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Firms and inequality

Author

Listed:
  • De Loecker, Jan
  • Obermeier, Tim
  • Van Reenen, John
Abstract
In the last few decades, dramatic changes have been documented in the US business landscape. These include rising productivity and pay dispersion between firms, higher aggregate markups (of price over variable costs), growing dominance of big companies ("superstar firms"), a fall in the labour share of GDP and a decline in business dynamism. We review the existing literature and present a new analysis using comprehensive firm level panel data, to show that qualitatively, these trends are also apparent in the UK. This similarity suggests that common trends in technology (or globalisation) have been the driving force behind these changes, rather than country-specific institutions (such as weaker US antitrust enforcement). Since (at least) the mid-1990s, there has been a large increase in UK firm-level inequality (especially in the upper tails) of productivity, wages, markups, and labour shares. Of course, inequality between firms is much less of a concern than inequality between people. However, it can signal economic problems, such as a slowdown in the diffusion of ideas between leading and laggard firms and can foster higher wage inequality. Indeed, there has been little aggregate UK productivity growth since the Global Financial Crisis, and this has been a serious drag on median and mean real wages. We suggest a simple theoretical framework for understanding some of these trends and quantitatively analyse why, despite increasing markups, the, the UK labour share has not fallen as sharply as that in the US. Finally, we suggest some policy options in response to these worrying trends, include modernising competition rules to deal with the growth of superstar firms and strengthening worker bargaining power.

Suggested Citation

  • De Loecker, Jan & Obermeier, Tim & Van Reenen, John, 2022. "Firms and inequality," LSE Research Online Documents on Economics 119782, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119782
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    File URL: http://eprints.lse.ac.uk/119782/
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    More about this item

    Keywords

    firms inquality; financial crisis;

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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