Business and Inequality – Institute For Fiscal Studies

There have been dramatic changes in the business landscape of American companies over the past four decades, which have been widely documented by scholars and are the subject of much public debate (e.g., Van Reenen, 2018; Akcigit and Ates , 2019). In broad terms, many of these trends could be summed up by saying that corporate inequality has increased – companies are increasingly different in terms of productivity, wages, profit margins and size. These changes have been accompanied by several worrying trends such as declining productivity growth, stagnating real wages (especially for low-skilled workers), rising profit margins, a declining labor share in the GDP and a decline in business dynamism (e.g. the share of workers in start-ups has declined).

There are a large number of possible explanations for some (or all) of these trends. In general, some authors emphasize factors common to all countries, such as technological change and globalization (e.g. Aghion et al., 2019; Peters and Walsh, 2019; Hsieh and Rossi-Hansberg, 2019; Baqaee and Farhi, 2020; De Ridder, 2020). Others point to US-specific factors such as weakening antitrust enforcement and the erosion of labor market institutions such as minimum wages and unions (e.g. Philippon (2019) and Stansbury and Summers (2020) respectively). Of course, it is very likely that these forces interact with each other. Take the presence of technological changes in a rapidly globalizing world, where companies source from highly complex supply chains around the world, while potentially selling to a much larger pool of potential consumers. Technological changes have enabled companies to trade in larger markets and to fragment production in global value chains. This has different implications for local labor and product markets. Some countries might end up as the beneficiaries of this process, while others (at least relatively) mainly absorb the negative shocks. Even within a country, the “China shock”, for example, displaces manufacturing jobs in local labor markets in the United States (see Autor, Dorn and Hanson (2016)), but there are other places where businesses and people benefit from access to cheaper finished goods. and intermediate goods (e.g. Jaravel and Sager, 2019). Recent empirical work has shown the benefits of increased globalization in terms of lower production costs (the standard “gains from trade” argument). However, firms with market power will capture some of these cost savings, which will lead to an increasing dispersion of firm performance, and dynamically may further widen the gap between firms, ultimately giving rise to some of the facts mentioned above (see World Bank (2020) for a discussion in the context of global value chains).[1]

It is important to investigate whether these trends have also occurred in Britain for two reasons. First, such developments may have important implications for overall inequality in the UK. To give a few examples: (i) the increasing dispersion of firm productivity is reflected in an increase in wage inequality between those employed in high and low productivity firms; (ii) a lower labor share means lower wages or jobs for a given level of GDP, as well as greater household inequality (capital income being more unequally distributed than labor income); and (iii) higher markups imply higher prices for a given level of marginal costs (or that less of a drop in costs is passed on to consumers), which lowers the standard of living.

A second reason to study business trends in the UK is to help assess the explanations for these economic changes. If the trends are uniquely US-specific, this suggests that US institutions are more likely explanations than global factors such as technology or trade that broadly affect all countries. Although several articles take an international approach to these trends or have studied a particular economy, there have been few ‘deep dives’ into what the British experience has been and, to our knowledge, which cover a wide range of business sector results. The main aim of this chapter is to summarize what we know about these trends in the UK. We draw on several data sources, in particular the Historical Orbis (HO), a relatively new panel of the population of incorporated businesses since the mid-1990s. We also consider more traditional administrative data sources from the Office for National Statistics (ONS).

We find that almost all US trends are present in UK data, although UK information is generally not as rich as US information. In particular, we document at the micro level growing differences between firms in productivity, wages, size, and margins, similar to those observed in the United States. Generally, these shifts seem to be strongest in the top half of the cast, with the top tail widening as “superstar” companies move away from the rest of the pack. Similarly, at the macro level, the UK has seen rising aggregate markups (as in the US), slowing productivity and wage growth since the global financial crisis (more dramatic than in the US) United States) and a decline in the share of wages in GDP since 1980 (much less severe than in the United States).[2] Trends in British entrepreneurship in the UK are more ambiguous.

Main conclusions

  • There is great inequality between companies. In the UK, just 0.1% of businesses have at least 250 workers, but in 2019 these businesses accounted for almost two in five jobs and just under half of overall turnover.
  • Over the past few decades, dramatic changes have been documented in the business landscape in the United States. These include the increase in productivity inequalities between firms, higher aggregate markups (of price over variable costs), increasing dominance of large firms, a declining labor share of GDP, and declining firm dynamism.
  • Many of the same empirical trends observed in the United States have occurred in Britain since (at least) the mid-1990s. There has been an increase in firm-level inequality (especially in the upper tails) of productivity, wages, markups and labor shares.
  • The UK has experienced weak productivity growth since the global financial crisis of 2008-2009. This weighed on median and average real wages, which had barely recovered to pre-crisis levels at the onset of the COVID-19 pandemic.
  • Overall mark-ups have been rising since at least the mid-1990s. Labor’s share of GDP has fallen since the early 1980salthough this decline is less dramatic than that of the United States.
  • The similarity of trends in the UK and the US suggests that common trends in technology or globalization have driven these changes, rather than country-specific institutions or policies.
  • Inequality between companies is less of a concern than inequality between people. However, it can signal economic problems, such as a slowing of the diffusion of ideas between leading companies and laggards, and can promote greater wage inequality.
  • We suggest policy options in response to these trends include the modernization of competition rules to cope with the growth of “superstar” companies and the strengthening of the bargaining power of workers.

[1] DeLoecker et al. (2016) present evidence of rising markups during drastic trade reforms in Indian manufacturing, precisely through the incomplete pass-through of lower input tariffs. More generally, productivity improvements may be captured disproportionately by firms rather than by workers and consumers.

[2] See Gutiérrez and Piton (2020) and Teichgraeber and Van Reenen (2021). The relationship between the aggregate labor share and measures of profitability is complex, even setting aside all notorious measurement challenges (see Van Reenen (2018), Koh, Santaeulàlia-Llopis and Zheng (2020), Autor et al (2020) and Barkai (2021)). See the subsection titled “Connecting Labor and Product Markets: A Simple Framework” in Section 4 for more details.

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