Why the labor share of GDP is shrinking as superstar firms dominate the economy
Since 2000, the portion of GDP flowing to wages and benefits has steadily declined. While some fear automation is the culprit, research suggests a different mechanism: the rise of superstar firms. These highly productive companies are capturing more market share, fundamentally shifting how wealth is distributed across the economy.
The labor share of GDP represents the total compensation paid to workers, including wages, salaries, and benefits, as opposed to the share captured by capital owners. Since 2000, this share has fallen significantly in the United States and many other nations. While macro-level data often obscures the underlying causes, a 2019 study by David Autor and colleagues utilized micro panel data from the U.S. Economic Census dating back to 1982 to uncover a clearer picture of this trend.
The central hypothesis is that globalization and technological advancements have pushed sales toward the most productive firms in each industry. These 'superstar firms' are characterized by high markups and a lower labor share of value added. As these companies dominate their respective markets, industry concentration rises, and the aggregate labor share of the economy falls. This shift is not necessarily because individual firms are cutting labor costs, but because economic activity is being reallocated toward firms that naturally employ fewer workers relative to their output.
The researchers tested seven specific predictions to validate this theory, including whether industries with the fastest productivity growth also see the highest concentration and the largest drops in labor share. They found empirical support for all seven, confirming that the aggregate markup rises faster than the typical firm's markup. These patterns are not limited to the U.S. but are observed internationally. Ultimately, this suggests that the decline in the labor share is a byproduct of a market structure where a small number of highly efficient firms capture an increasing portion of total sales.
This research matters because it reframes the debate over inequality. Rather than focusing solely on the threat of robots replacing human labor, the findings highlight the role of market concentration and firm-level productivity. By understanding that the labor share decline is driven by the reallocation of sales to superstar firms, policymakers can better address the concentration of wealth in the hands of fewer business owners and shareholders.
Source: The Rise of Superstar Firms and the Fall of the Labor Share (David Autor, MIT)
