by Adrian Pietrzak
June 13th, 2016
Americans have always had a certain level of reverence towards their entrepreneurs. Their success is the classic American tale. Nearly every iteration of “The American Dream” will include the Horatio Alger rags-to-riches self-made man. Many still dream of being their own boss, starting their own company, and “making it.” Yet, this dream may be just that, a dream. Over the past 20-30 years, the American economy has faced widespread consolidation that has led to a concentration of capital and labor amongst fewer and fewer firms. America, the land of dynamic free enterprise, now has a serious competition problem. Everyday Americans are experiencing this concentration in their paychecks, career paths, and political system.
DAVID VERSUS GOLIATH, AN ALTERNATIVE ENDING
Today, the average American works for a Goliath. Gone are the days of “mom and pop” shops, welcome to the era of retail-chains and multinational conglomerates. Firms with over 500 employees, only 0.3% of all firms, accounted for 45.5% of all employment in 1988. In 2011, that figure rose to 51.5%. In 2011 the top 0.016% of firms (those employing over 10,000 workers) accounted for a whopping 27.8% of all US employment.
And it’s not just employment. Many other measures of firm concentration point to the same trend. The Economist calculates that nearly two-thirds of some 900 industries have become more concentrated between 1998 and 2012. Moreover, the average market share of the top four firms across these markets has increased from 26% to 32%. A recent wave of high-profile mergers hasn’t helped matters – markets are increasingly being held by the few.
A NEW ERA FOR STARTUPS
Having bigger companies isn’t always bad. Concentration which takes advantage of economies of scale may improve productivity and growth, ultimately leading to lower prices and a more robust economy. However, recent research links bigger companies with less dynamic growth. Since 2000, there has been a marked decline in business dynamism and entrepreneurship – normally one of America’s most desirable qualities.
A decline in startups (despite the popular perception of a ubiquitous Silicon Valley Golden Age) can have serious economic consequences because smaller firms disproportionately create jobs compared to their larger competitors. Furthermore, high-growth startups, not larger firms, are responsible for high levels of productivity growth, such as that witnessed in the 1980s and 90s. Ultimately, a lack of startups and small firms leads to lower productivity and growth, which does not bode well for a sluggish economy.
(NOT) CHURNING AND CHURNING IN THE WIDENING GYRE
Less dynamic businesses, less dynamic workers. Job-to-job flows, the rate at which workers and business exchange jobs, declined by roughly 47% between 1998 and 2010. The rate of hiring and separation both fell as well, with 10% and 38% declines, respectively. Strikingly, over one quarter of this decline can be linked back to increasing firm size and age.
On the surface, falling employment dynamics could mean that employees are experiencing more job stability or that workers are finding better career matches. However, more job reallocation has been associated with higher growth, while less movement can be indicative of a less flexible labor market. Job movement is also important for people’s wages, as switching jobs usually leads to higher salaries, especially for young people.
DEPRESSED WAGES AND A DEPRESSED CENTER
Stagnating wages have plagued the average American for decades. A widening wage gap has caused a return to Gilded Age levels of income inequality. While globalization causing changes in skill demands is thought to be the main driver, large companies may also exacerbate inequality. Large companies effectively suppress wages, as they replace routine jobs with machines or foreign labor. Middle-skill workers are worst off, paying a premium to work at large companies in exchange for possible promotion. Meanwhile, large companies compensate their executives lavishly. Moving from a small to large company increases the wage of the top employee by 280% compared to the wage of the lowest employee.
This phenomenon has helped thin out an already ailing middle class. High inequality may dampen demand, and certainly dampens political stability. The retreat of centrist candidates has been shown by the surge of economic demagogues. Americans feel that their economy is rigged – and it may very well be. But few proposals from both the left and right would help. Scapegoating outsourcing, the rich, or immigrants is ineffective – what America needs are smaller firms and more competition.
References
The Economics Review 