The American worker is losing out. As the US labor share declines, many people blame globalization and automation, or robots doing people’s work. But after analyzing the data, Chicago Booth’s Simcha Barkai has a different view: he says workers are suffering because there’s less and less corporate competition. Increasing that competition to past levels, he says, could raise US wages by up to 20 percent.
Narrator: The American worker is losing out. You’ve probably heard that before. In other words, the labor share is declining. The labor share is the part of the national income that’s earned from wages. There’s also capital share. That’s the money generated by assets. And the traditional explanations for why this is happening are well known. One is that workers are losing out to robots.
Simcha Barkai: We can think of a General Motors manufacturing plant. And back in the 1980s, you would have a welder that would weld car parts together. And today, if you visit the General Motors manufacturing plants, there are no workers welding car parts together. This job is performed exclusively by robots. And the logic goes that dollars we used to be spending on people we have shifted over to these robots instead. And so if we were to track the cost of purchase and maintenance and financing of all of this capital—the robots—we would find that dollars have just shifted from one type of input to another.
Narrator: Another traditional explanation is that American workers are losing out to workers in China, or India, or Mexico. But there’s evidence the decline in the labor share is not accounted for by globalization or automation. And to get at the answer, we need to track the dollars.
Simcha Barkai: I track the dollars that firms are spending on the purchase, finance, and maintenance of capital. This includes structures. It includes equipment and robots. And what I found was that as a fraction of output, we’re spending not only less on workers, we are also spending less on all of capital. So labor share is declining. Capital share, which are the costs of financing, purchasing, and maintaining this capital, that too is declining as a share of output. And what’s gone up over this period are profits, what the firm gets to keep after accounting for all of its costs, what the equity owners get to keep. Profits, that has been the big winner over the past 30 years.
Narrator: These findings suggest that workers in the US are not losing out to robots or to workers in Mexico and China. They are losing out to shareholders. And the robots are losing out as well. The research indicates that the reason why this is happening is competition. Or, to be more precise, a lack of competition.
Simcha Barkai: Over time, the largest four firms are taking over. They’re increasing their market share. This is a widespread phenomenon. It happens in about 70 percent of industries. What is more, those industries in which the largest four firms are taking over are precisely the industries in which the labor share is declining.
Narrator: This may be happening because firms are choosing not to compete or because they are unable to compete. But the result is the same. Prices get marked up and profits skyrocket, but output, wages, and investment stagnate. And it’s taken decades of diminishing competition for us to reach this point. If we were somehow able to flip a switch and return competition to the levels it was at 30 years ago, here’s what the data suggest would happen.
Simcha Barkai: So I look at four different things. The first thing I look at is: What would happen to output? How many more goods and services would firms provide if competition were increased to a higher level? And my calculations suggest that output would increase by about 10 percent. In order to get consumers to purchase all of these additional goods and services, prices would go down. So the prices that you and I face would go down over time. In order to produce all of these additional goods and services, firms would have to invest more in equipment and they would have to hire more workers. They would have to expand their production possibilities. And my final finding is that wages in the US economy would be up to 20 percent higher if we can increase competition to past levels.
Narrator: So to help increase the labor share, we need to focus on fostering competition. And that’s a big policy challenge. But getting rid of the perception that workers’ problems are all caused by foreign labor and automation may end up being an even bigger challenge. (energetic, bouncy piano music)
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