Firms and inequality

Date
March 3, 2022
Issues
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There have been some dramatic changes in the business landscape in American firms over the last four decades that have been extensively documented by researchers and are the subject of much public debate (e.g. Van Reenen, 2018; Akcigit and Ates, 2019).

In broad terms, one could summarise many of these trends by saying that firm inequality has increased – companies are looking increasingly different in terms of their productivity, wages, markups and size. These changes have been accompanied by several worrying trends such as declining productivity growth, stagnating real wages (especially for low-educated workers), rising markups, a falling share of labour in GDP and declining business dynamism (e.g. the share of workers in young firms has declined).

Executive summary

  • There is huge inequality between firms. In the UK, only 0.1% of businesses have at least 250 workers, but in 2019 these companies accounted for almost two in five of all jobs and just under half of aggregate turnover.
  • In the last few decades, dramatic changes have been documented in the business landscape in the US. These include rising productivity inequality between firms, higher aggregate markups (of price over variable costs), a growing dominance of big companies, a fall in the labour share of GDP and declining business dynamism.
  • Most of the same empirical trends seen in the US have occurred in Britain since (at least) the mid 1990s. There has been an increase in the firm-level inequality (especially in the upper tails) of productivity, wages, markups and labour shares.
  • The UK has had little productivity growth since the Global Financial Crisis in 2008–09. This has been a drag on median and mean real wages, which had barely recovered to pre-crisis levels by the start of the COVID-19 pandemic.
  • Aggregate markups have risen since at least the mid 1990s. The labour share of GDP has fallen since the early 1980s, although this fall is less dramatic than that in the US.
  • The similarity of the UK and US trends suggests that common trends in technology or globalisation have been driving these changes, rather than country-specific institutions or policies.
  • Inequality between firms is less of a concern than inequality between people. However, it can signaleconomic problems, such as a slowdown in the diffusion of ideasbetween leading and laggard firms, and can foster higher wage inequality.
  • We suggest policy options in response to these trends include modernising competition rules to deal with the growth of ‘superstar’ firms and strengthening the bargaining power of workers.

Cite this as:

De Loecker, J., Obermeier, T. and Van Reenen, J. (2022), ‘Firms and inequality’, IFS Deaton Review of Inequalities, https://ifs.org.uk/inequality/firms-and-inequality