On Inequality of Wealth and Income – Causes and Consequences

 On Inequality of Wealth and Income – Causes and Consequences

 

Disparity in Wealth and Income of American workers/household is a hot public policy/economic/social/political issue.

  • Wealth (Stock)
  • Income (Flow)

what are the causes and consequences of Inequality on economics and society?

 

From TRENDS IN INCOME INEQUALITY AND ITS IMPACT ON ECONOMIC GROWTH (OECD)

The disparity in the distribution of household incomes has been rising over the past three decades in a vast majority of OECD countries and such long-term trend was interrupted only temporarily in the first years of the Great Recession. Addressing these trends has moved to the top of the policy agenda in many countries. This is partly due to worries that a persistently unbalanced sharing of the growth dividend will result in social resentment, fuelling populist and protectionist sentiments, and leading to political instability. Recent discussions, particularly in the US, about increased inequality being one possible cause of the 2008 financial crisis also contributed to its relevance for policy making. But another growing reason for the strong interest of policy makers in inequality is concern about whether the cumulatively large and sometimes rapid increase in inequality might have an effect on economic growth and on the pace of exit from the current recession. Is inequality a pre-requisite for growth? Or does a greater dispersion of incomes across individuals rather undermine growth? And which are the short and long-term consequences of redistributive policies on growth?

From Causes and Consequences of Income Inequality: A Global Perspective (IMF)

Widening income inequality is the defining challenge of our time. In advanced economies, the gap between the rich and poor is at its highest level in decades. Inequality trends have been more mixed in emerging markets and developing countries (EMDCs), with some countries experiencing declining inequality, but pervasive inequities in access to education, health care, and finance remain. Not surprisingly then, the extent of inequality, its drivers, and what to do about it have become some of the most hotly debated issues by policymakers and researchers alike. Against this background, the objective of this paper is two-fold.

First, we show why policymakers need to focus on the poor and the middle class. Earlier IMF work has shown that income inequality matters for growth and its sustainability. Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.

Second, we investigate what explains the divergent trends in inequality developments across advanced economies and EMDCs, with a particular focus on the poor and the middle class. While most existing studies have focused on advanced countries and looked at the drivers of the Gini coefficient and the income of the rich, this study explores a more diverse group of countries and pays particular attention to the income shares of the poor and the middle class—the main engines of growth. Our analysis suggests that

  • Technological progress and the resulting rise in the skill premium (positives for growth and productivity) and the decline of some labor market institutions have contributed to inequality in both advanced economies and EMDCs. Globalization has played a smaller but reinforcing role. Interestingly, we find that rising skill premium is associated with widening income disparities in advanced countries, while financial deepening is associated with rising inequality in EMDCs, suggesting scope for policies that promote financial inclusion.

  • Policies that focus on the poor and the middle class can mitigate inequality. Irrespective of the level of economic development, better access to education and health care and well-targeted social policies, while ensuring that labor market institutions do not excessively penalize the poor, can help raise the income share for the poor and the middle class.

  • There is no one-size-fits-all approach to tackling inequality. The nature of appropriate policies depends on the underlying drivers and country-specific policy and institutional settings. In advanced economies, policies should focus on reforms to increase human capital and skills, coupled with making tax systems more progressive. In EMDCs, ensuring financial deepening is accompanied with greater financial inclusion and creating incentives for lowering informality would be important. More generally, complementarities between growth and income equalityobjectives suggest that policies aimed at raising average living standards can also influence the distribution of income and ensure a more inclusive prosperity.

From World changes in inequality: an overview of facts, causes, consequences and policies (BIS)

Public concern about inequality has grown substantially in recent years. Politicians and journalists descant with increasing frequency on the increase in inequality as a threat to social stability, laying the blame on globalisation and its attendant so-called neo-liberal policies. There is certainly much truth in such views. However, the lack of rigour in the public debate is striking, and one may doubt whether a constructive discussion of inequality, its causes and its economic, social and political consequences can take place without more clarity. Is it really the case that inequality is everywhere increasing more or less continuously, as actually seems to be happening in the United States? What type of inequality are we talking about: earnings, market income, household disposable income per consumption unit, wealth? What matters most: the inequality of opportunity or the inequality of economic outcome, including income? What kind of measure should be used? The recently highly publicised share of the top 5, 1.1% taken from tax data may not evolve in the same way as the familiar Gini coefficient defined on disposable incomes. And, then, what is known about the nature of the unequalising forces that seem to affect our economies and what tools might be available to counteract them?

In an international survey conducted in 2010, people were asked how they thought inequality had changed over the previous 10 years.1 In few countries was the perception of inequality trends in agreement with what could be observed from standard statistical sources about inequality. US citizens felt inequality had remained the same, whereas it was surging by most accounts, Brazilians found it was also increasing despite the fact that, for the first time in over 40 years, inequality was declining, while French and Dutch people thought that inequality had increased although the usual inequality coefficients were remarkably stable.

Good policies must rely on precise diagnostics. It is the purpose of this paper to take stock of what is known at this stage about the evolution of inequality around the world. In so doing, it will be shown that an ever-increasing degree of inequality at all times and everywhere over the last 30 years is far from the reality, and that there is a high degree of specificity across countries. In turn, this suggests that the combination of equalising and unequalising forces may be quite different from one country to another. Some factors may be common and truly global but others may be country-specific, the outcome being quite variable across countries. It also follows that tools to correct inequality, if need be, may have to differ in nature depending on the causes of increased inequality.

Tackling all these issues in depth is beyond the scope of this paper. My aim is only to offer an overview of what is observed and the main ideas being debated in the field of economic inequality. The paper is organised as follows. It starts with a quick “tour d‘horizon“ of the evidence for the evolution of various dimensions of economic inequality. It then tackles the issue of the potential causes, identifying what may be seen as common to most countries and what may be specific. Finally, it touches upon the consequences of excessive inequality and the tools available to counter it, emphasising the rising constraints imposed by globalisation.

Causes of Inequality

  • Shareholder Capitalism
  • Focus on Cost Minimization
  • Focus on ROIC and Economic Value Added (EVA)
  • Consolidation – Mergers and Acquisitions
  • Free Trade Agreements – NAFTA
  • Increased Outsourcing
  • Global Commodity Chains
  • Global Production Networks
  • Global Value Chains
  • Lack of Educated Workforce
  • Lack of protection for Low income earners
  • Compensation for Executives vs Labor
  • Unemployment, Underemployment
  • Value of High Skilled Technical Workers
  • Technological Change
  • Skills Obsolescence

Consequences of Inequality

  • Impact on Effective Demand
  • Slows Economic Growth
  • Decreased Economic Mobility
  • Health and Social effects
  • Living Standards at the Bottom (Poverty)
  • Intergenerational Mobility
  • Democratic Process and Social Justice
  • Reduced Consumption
  • Financial Crisis
  • Social Cohesion
  • Global Imbalances
  • Hampers Poverty reduction
  • Access to Health services
  • Access to Financial Services
  • Access to Education

 

Key Sources of Research:

 

The Age of Inequality

Edited by Jeremy Gantz

2017

 

 

The Price of Inequality

Joseph Stiglitz

2012

A Firm-Level Perspective on the Role of Rents in the Rise in Inequality

Jason Furman

Peter Orszag

October 16, 2015

http://gabriel-zucman.eu/files/teaching/FurmanOrszag15.pdf

Firming Up Inequality

Jae Song, David J. Price Fatih Guvenen, Nicholas Bloom

2015

http://eprints.lse.ac.uk/62587/1/dp1354.pdf

 

 

 TOWARDS A BROADER VIEW OF COMPETITION POLICY

 

Joseph E. Stiglitz

University Professor, Columbia University,

Chief Economist at the Roosevelt Institute

June 2017

https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/Towards%20a%20Broader%20View%20of%20Competition%20Policy_0.pdf

 

 

ACCOUNTING FOR RISING CORPORATE PROFITS: INTANGIBLES OR REGULATORY RENTS?

Boston University School of Law
Law & Economics Working Paper No. 16-18

November 9, 2016

https://www.bu.edu/law/files/2016/11/Accounting-for-Rising-Corporate-Profits.pdf

Inequality: Facts, Explanations, and Policies

Jason Furman
Chairman, Council of Economic Advisers

City College of New York New York, NY

October 17, 2016

https://obamawhitehouse.archives.gov/sites/default/files/page/files/20161017_furman_ccny_inequality_cea.pdf

Domestic Outsourcing, Rent Seeking, and Increasing Inequality

 Eileen Appelbaum

First Published July 21, 2017

http://journals.sagepub.com/doi/abs/10.1177/0486613417697121

 

Global Concentration and the Rise of China

Caroline Freund and Dario Sidhu

Peterson Institute for International Economics

http://econ.au.dk/fileadmin/Economics_Business/Research/Seminars/2016/Global_Concentration_Final.pdf

How Could Wage Inequality within and Across Enterprises Be Reduced?

Columbia Business School Research Paper No. 17-62

Posted: 10 Jun 2017 Last revised: 17 Aug 2017

Christian Moser

Columbia University

Date Written: December 15, 2016

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2983691

 

 

 

The Fall of the Labor Share and the Rise of Superstar Firms

David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, John Van Reenen

NBER Working Paper No. 23396
Issued in May 2017

http://www.nber.org/papers/w23396

Inequality: A Hidden Cost of Market Power

Posted: 29 Mar 2017 Last revised: 31 Mar 2017

Sean F. Ennis  Pedro Gonzaga  Chris Pike

Organization for Economic Co-Operation and Development (OECD) – Competition Division

Date Written: March 6, 2017

https://papers.ssrn.com/Sol3/papers.cfm?abstract_id=2942791

 

 

Wealth and Income Inequality in the Twenty-First Century

Joseph E. Stiglitz
International Economic Association World Congress
Mexico City
June 2017

https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/Wealth%20and%20Income%20Inequality%2021st%20Century.pdf

 

 

The Globalization of Production and Income Inequality in Rich Democracies

Matthew C Mahutga
Anthony Roberts
Ronald Kwon

Social Forces, Volume 96, Issue 1, 1 September 2017, Pages 181–214,

 

INCOME AND WEALTH INEQUALITY: EVIDENCE AND POLICY IMPLICATIONS

EMMANUEL SAEZ

Contemporary Economic Policy

Vol. 35, No. 1, January 2017, 7–25
Online Early publication October 14, 2016

 

https://eml.berkeley.edu/~saez/SaezCEP2017.pdf

 

 

Consequences of Rising Income Inequality

BY KEVIN J. LANSING AND AGNIESZKA MARKIEWICZ

October 17, 2016

Economic Research Department of the Federal Reserve Bank of San Francisco.

 

http://www.frbsf.org/economic-research/files/el2016-31.pdf

 

 

 

Top Incomes, Rising Inequality, and Welfare

Kevin J. Lansing
Federal Reserve Bank of San Francisco

Agnieszka Markiewicz

June 2016

http://www.frbsf.org/economic-research/files/wp12-23bk.pdf

 

 

Causes and Consequences of Income Inequality: A Global Perspective

Era Dabla-Norris, Kalpana Kochhar, Frantisek Ricka, Nujin Suphaphiphat, and Evridiki Tsounta
(with contributions from Preya Sharma and Veronique Salins)

IMF

June 2015

https://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf

 

 

Piketty, Thomas. 2014.

Capital in the Twenty-First Century.

Cambridge, MA: Harvard University Press.

 

 

Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007

Edward N. Wolff

Levy Economics Institute of Bard College

March 2010

http://www.levyinstitute.org/pubs/wp_589.pdf

 

 

 

CONSUMPTION AND INCOME INEQUALITY IN THE U.S. SINCE THE 1960S

Bruce D. Meyer James X. Sullivan

NATIONAL BUREAU OF ECONOMIC RESEARCH

August 2017

http://www.nber.org/papers/w23655.pdf

 

 

Top Income Inequality in the 21st Century: Some Cautionary Notes

Fatih Guvenen Greg Kaplan

April 2, 2017

https://gregkaplan.uchicago.edu/sites/gregkaplan.uchicago.edu/files/uploads/top_income_inequality_web_April2_2017.pdf

 

FIFTY YEARS OF GROWTH IN AMERICAN CONSUMPTION, INCOME, AND WAGES

Bruce Sacerdote

May 16, 2017

http://www.dartmouth.edu/~bsacerdo/Sacerdote%2050%20Years%20of%20Growth%20in%20American%20Wages%20Income%20and%20Consumption%20May%202017.pdf

http://www.nber.org/papers/w23292.pdf

 

 

The Inequality Puzzle

BY LAWRENCE H. SUMMERS

 

http://democracyjournal.org/magazine/33/the-inequality-puzzle/

 

 

 

 GLOBAL INEQUALITY DYNAMICS: NEW FINDINGS FROM WID.WORLD

Facundo Alvaredo Lucas Chancel Thomas Piketty Emmanuel Saez Gabriel Zucman

NATIONAL BUREAU OF ECONOMIC RESEARCH
February 2017, Revised April 2017

 

http://www.nber.org/papers/w23119.pdf

 

 

 

Power and inequality in the global political economy

NICOLA PHILLIPS

March 2017

https://academic.oup.com/ia/article-lookup/doi/10.1093/ia/iix019

 

 

 Outsourcing governance: states and the politics of a ‘global value chain world’

Frederick W. Mayer & Nicola Phillips

04 Jan 2017

 

http://www.tandfonline.com/doi/full/10.1080/13563467.2016.1273341

 

 

What’s caused the rise in income inequality in the US?

https://www.weforum.org/agenda/2015/05/whats-caused-the-rise-in-income-inequality-in-the-us/

Why are American Workers getting Poorer? China, Trade and Offshoring

Avraham Ebenstein, Ann Harrison, Margaret McMillan

NBER Working Paper No. 21027
Issued in March 2015

http://www.nber.org/papers/w21027

 

 

 

The Geography of Trade and Technology Shocks in the United States

David H. Autor, David Dorn, and Gordon H. Hanson

American Economic Review

May 2013

https://www.aeaweb.org/articles?id=10.1257/aer.103.3.220

 

Economic Consequences of Income Inequality

Jason Furman
Joseph E. Stiglitz

https://pdfs.semanticscholar.org/cee6/1573cd50b9c8eae3379cf1f1c92301f40927.pdf

 

Labor’s Declining Share of Income and Rising Inequality

https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/2012-economic-commentaries/ec-201213-labors-declining-share-of-income-and-rising-inequality.aspx

 

 

World changes in inequality: an overview of facts, causes, consequences and policies

by François Bourguignon
Monetary and Economic Department
August 2017

BIS working paper

http://www.bis.org/publ/work654.pdf

“Trends in Income Inequality and its Impact on Economic Growth”

OECD Social, Employment and Migration Working Papers, No. 163

http://www.oecd.org/social/inequality.htm

http://www.oecd.org/els/soc/trends-in-income-inequality-and-its-impact-on-economic-growth-SEM-WP163.pdf

 

Causes of income inequality in the United States

https://en.wikipedia.org/wiki/Causes_of_income_inequality_in_the_United_States

 

Economic inequality

https://en.wikipedia.org/wiki/Economic_inequality

 

 

Income inequality in the United States

https://en.wikipedia.org/wiki/Income_inequality_in_the_United_States

 

 

Redistribution, Inequality, and Growth

Prepared by Jonathan D. Ostry, Andrew Berg, Charalambos G. Tsangarides

 

April 2014

IMF

 

https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf

 

 

 

Understanding the Economic Impact of the H-1B Program on the U.S.

John Bound† Gaurav Khanna‡ Nicolas Morales§

April 20, 2017

 

http://www.nber.org/chapters/c13842.pdf

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Rising Profits, Rising Inequality, and Rising Industry Concentration in the USA

Rising Profits, Rising Inequality, and Rising Industry Concentration in the USA

 

There is a need for holistic/systemic understanding of causal relations among

  • Low Economic Growth
  • Low Real Long Term Interest Rates
  • Decreased Business Investment
  • Mergers and Acquisitions Activity
  • Industry Concentration
  • Decreased Competition
  • Rising Profits
  • Income Inequality
  • Shareholder Capitalism
  • Dividends Payouts
  • Buyback of Shares
  • Superstar Firms
  • Too Big to Fail
  • Oligopoly Economy / Oligarchy
  • Decreased Number of Stocks/Equities
  • Focus on Costs Minimization
  • Increased Outsourcing
  • Global Value Chains
  • Free Trade Agreements
  • Market Power (Increased Market Share)
  • Decreased Dynamism
  • Herding by Suppliers
  • Labor Vs Executive Compensation
  • Unemployment
  • Concentration in Occupations

And don’t forget managerial focus on

  • Economic Value Added (EVA) since 1990s

 

There are two views to look at these issues

  • Aggregated View – Corporate Agglomeration and Spatial Dispersion / Extension
  • Disaggregated View – Micro Motives, Macro Behavior ( Bottom up Agent based view)

 

As the research papers below indicate, the scholarship is recent and need much more attention by the Economists and Policy makers.

 

From Is There a Connection Between Market Concentration and the Rise in Inequality?

The rise in wealth and income inequality has been at the forefront of the political debate in the U.S. in the last few years. At the same time, issues like market power and concentration, bigness, and antitrust have also come back into prominence, propelled by a growing body of research that points to diminishing competition across multiple American industries.

The possible connection between inequality and market concentration, however, has been relatively understudied for many years—until recent years, that is, when a sheafof new studies examining the interactions between concentration, market power, and inequality began to appear.

A 2015 paper by Jonathan Baker and Steven Salop, for instance, examined the connection between inequality and market power and argued that “because the creation and exercise of market power tend to raise the return to capital, market power contributes to the development and perpetuation of inequality.” Harvard Law School’s Einer Elhauge also found that horizontal shareholding likely leads to anti-competitive price raises and has regressive effects. Daniel Crane of the University of Michigan, however, contends that the connection between antitrust and wealth inequality has been grossly oversimplified by advocates of tougher antitrust enforcement.

Asked if there was a connection between concentration and inequality, Chicago Booth professors Austan Goolsbee, Steven Kaplan, and Sam Peltzman pointed to data being inconclusive. Goolsbee said: “Probably [there is a connection]. But we don’treally know more than correlations at this point.” Kaplan said his own research “suggests that winner-take-all markets (driven by technology and scale) play a rolein inequality. However, they may not play the most important role.” And Peltzmansaid that “The timing suggests so, but there are a lot of unconnected dots in this question.”

Is rising inequality connected to monopolies, rent-seeking, and concentration, or is it a result of larger forces like globalization and technology? Can antitrust be used effectively to mitigate inequality, or is concentration a sign of greater efficiency? These questions, and others, were debated by economists and legal scholars during a panel at the recent Stigler Center conference on concentration in America.

The panel featured Peter Orszag, Vice Chairman and Managing Director of the financial advisory and asset management firm Lazard Freres; Justin Pierce, a Senior Economist at the Board of Governors of the Federal Reserve; Lina Khan, a fellow at Open Markets program at New America; Sabeel Rahman, an Assistant Professor of Law at Brooklyn Law School; Simcha Barkai, a PhD Candidate at the University of Chicago Booth School of Business; and German Gutierrez, a PhD Candidate at the New York University Stern School of Business. The panel was moderated by Matt Stoller of the Open Markets program at New America, who opened by observing that “a new kind of Brandeis School of antitrust is emerging, in terms of thinking about political economy.”

Much of the panel focused on the dramatic rise in corporate profits. A recent, much-discussed Stigler Center working paper by Simcha Barkai found that over the past 30 years, as labor’s share of output fell by 10 percent, the capital share declined even further. This finding goes against the argument that the labor share went down due to technological changes, or as Barkai put it: “We used to spend money on people, today we’re spending money on robots.”

Barkai’s paper finds no evidence to support the technological argument. “We’re spending less on all inputs. If you think of this from the perspective of a firm, this is terrific. After accounting for all of my costs—material inputs, workers, capital—I am left with a large amount of money, much more so than in the past.” What Barkai does find, however, is that profits have gone way up. From 1984 to 2014, the profit share increased from 2.5 percent of GDP to 15 percent.

“To give you a sense of how large these profits are, if you look over the past 30 years and you ask, ‘How much have profits increased?’ you can give a number in dollars. A better way to think about that is, “Per worker, how much have these dollars increased?” It’s about $14,000 per worker. That’s a really large number because, in 2014, personal median income was just over $28,000. It’s about half of personal median income,” said Barkai.

Barkai went on to say that these findings were more pronounced in industries that experienced an increase in concentration. “Those industries that have a large increase in concentration also have larger declines in the labor share,” he said. Barkai’s conclusions were echoed by a separate study that was recently published by David Autor, David Dorn, Lawrence Katz, Christina Patterson, and John Van Reenen, in which they found that higher concentration is connected to the fall in the labor share.

One way to consider the question of concentration and inequality, said Pierce, is to look at what happens to firms’ efficiency and markups as a result of a merger. In a recent paper with Bruce Blonigen, Pierce was able to utilize new techniques in order to isolate the effects of mergers in the manufacturing sector. Comparing data from factories that were acquired during mergers to similar factories that weren’t, and to factories where an acquisition has been announced but not yet completed, Pierce and Blonigen found no evidence of the standard argument that mergers benefit consumers by increasing efficiency, reducing production costs, and, in turn, lowering prices. Quite the opposite: they found evidence that mergers increase market power, allowing firms to generate higher profits by raising prices.

“What we find when we do this is that mergers on average are associated with increases in markups in a magnitude of 15 to 50 percent. When we look at the effect on productivity, we actually don’t find a statistically significant effect on productivity associated with mergers,” said Pierce.

Gutierrez, meanwhile, spoke about his 2016 paper with Thomas Philippon, in which the two found that concentrated industries with less entry and more concentration invest less. Before 2000, he explained, firms funneled about 20 cents of every dollar of surplus into investments. Since 2000, however, investments dropped by half—to 10 cents on the dollar.

Their findings, he said, rule out the argument that the drop in investments is related to control by the stock market. The data also rule out other theories, such as financial constraints, safety premiums, or globalization. “What we’re left with is competition, or lack of competition and governance,” said Gutierrez.

“What we find is that most industries have become more concentrated. That leads to a decrease in investment. It means less investment by leaders in particular, and at the industry as a whole. Some manufacturing industries have seen increased competition from China. For the U.S. in particular, we see that leaders invest more. They try and hold onto their position, but the overall effect is somewhat negative on aggregate investment in the U.S.”

How is this drop in investments connected to an increase in concentration? Gutierrez offered two hypotheses: one, that superstar firms, such as digital platforms, are more productive and are therefore capturing more market share. The second, he said, is increased regulation: “In particular, if you look at the cross section of industries, industries where regulation has increased have also tended to become more concentrated and have invested less.”

Orszag, the former head of the Office of Management and Budget and former Director of the Congressional Budget Office, co-authored a 2015 paper with former Obama economic adviser Jason Furman that explored the rise in “supernormal returns on capital” among firms that have limited competition. In the panel, he spoke about what he described as a “dramatic rise” in dispersion among firms in productivity and wages as an understudied driver of inequality.

“In general, if you look at most textbooks on economics and most discussions of public policy, firms are seen as this uninteresting thing that you have to deal with but don’t want to really get into the innards of. Why do some firms behave differently than others? Having now spent a bunch of time in the private sector, the culture in firms really is quite different. Firms do behave differently from one to another beyond just market structure. Within the same market in the same field, Firm A is not the same as Firm B, as people who work inside those firms know.”

Orszag pointed to OECD data that showed that top global firms have been largely exempted from the decline in productivity that advanced economies experienced over the last 10-15 years. “If there’s a structural explanation for that, whether it’s polarization or market structure or innovation, why is it affecting only the laggards in the industry and not those at the frontier? Secondly, why aren’t there more spillovers from the frontier firms within each sector to others? What is happening to the flow of information or the flow of technique or what have you that’s causing this broad, significant rise in productivity deltas across firms, even within the same sector?” he asked.

Orszag also suggested that contrary to media narratives that present growing gaps between CEO wages and median workers within each firm as a prominent driver of inequality, the bulk of the rise in wage gaps is happening between firms, and not within the firms themselves. Studies, he said, show a dramatic increase in between-firm wage inequality “and very little movement except at the very, very largest firms in within-firm inequality.”

Orszag added: “We don’t know exactly what’s causing this. This may be a sorting of workers. It may be sharing of rents in the form of wages for the top firms. It may be a whole variety of different things. What I do suggest is the vast majority of the discussion on income-and-wage inequality seems to just glide over this whole thing as if it doesn’t exist.”

A holistic approach to inequality and concentration

Khan, who in a recent paper with Sandeep Vaheesan explored the role of monopoly and oligopoly power in perpetuating inequality, argued that the way to understand the connection between market concentration and inequality is to take a more holistic approach.

The connection between excessive market concentration and inequality, she said, has been understudied for a long time. “We were really surprised to see that at the time, in 2014, there really wasn’t much research on this connection at all. The most comprehensive paper that we found was from 1975 by William Comanor and Robert Smiley, which found that monopoly power did in fact transfer wealth to the most affluent members of society and suggested that a more competitive economy would have more progressive redistributive effects,” said Kahn. “One way to understand why this connection between market concentration and inequality has been understudied is that the law decided that it wasn’t really important. Once we shifted from an antitrust approach that took a more holistic and multidimensional view of the effect of market power to an approach that privilege means prices, the research on these effects also took a hit.”

In their paper, Khan and Vaheesan argue that inequality not only harms efficiency, but also that firms use their market power to raise prices “above competitive levels to consumers and push prices below competitive levels for small producers.” The paper makes a case for more rigorous enforcement of antitrust laws, arguing that reinvigorating antitrust could be one possible remedy for the regressive redistributive effects of concentration and the political power of monopolies.

“I think at a very basic level, our current political economy reflects 30 years of doing antitrust in a very particular way,” said Khan, who listed several industries such as airlines, healthcare, pharmaceuticals, and telecom, where prices have risen following mergers and industry consolidation.

“New business creation and growth have been on a secular decline. It’s worth recalling that in an earlier era, owning one’s own business was a form of asset building for the middle class, a way of passing on wealth to one’s children. This is especially still true in immigrant communities, where owning your own bodega or your own dry-cleaning service is a path of upward mobility. You can imagine how markets that shut out independent businesses are also effectively closing off that path of asset building,” said Khan.

Khan went on to discuss the political implications of excessive market power and how they can further entrench inequality. “Big firms and concentrated industries enjoy a level of political power that they can use to further entrench their economic dominance. Politics is another vessel by which we see this,” she said.

Rahman, author of the book Democracy Against Domination (Oxford University Press, 2016), also advocated for a wider view of the issue. “When we’re worried about the problem of concentration, I think it goes much broader than the specific areas of mergers and firm size, although that’s a big part of it,” he said.

“When we think about the good things that we want from the economy, we want it to be dynamic, we want it to be innovative, we want it to enable mobility. These things are not natural products. They are a property of the underlying structure of firms, of labor markets, of financial markets, and of policies, including antitrust,” said Rahman, who went on to discuss two aspects of the rise in concentration: digital platforms and the “Uber-ization” of more and more economic sectors, and what he described as a “growing geographic concentration of wealth, income, and opportunity between rural and urban.”

Rahman suggested that other tools, not just antitrust, could be used to combat excessive market power—particularly when it comes to the power of digital platforms. “The way I want to frame this is as a problem of concentration and inequality that warps the structure of opportunity in our economy,” said Rahman. “You have antitrust and public utility law, corporate governance, and labor law as three parts of the larger ecosystem of law and regulation that, coming out of that Progressive era debate about power, were the three complements that together, it was hoped, would produce a high-opportunity, a high-mobility economy that was open to all.”

 

Please also see my related post.

Low Interest Rates and Business Investments : Update August 2017

 

In addition to papers listed above, also see papers and articles mentioned in the references below.

Key sources of Research:

 

Rising Corporate Concentration, Declining Trade Union Power, and the Growing Income Gap: American Prosperity in Historical Perspective

Jordan Brennan

March 2016

 

http://piketty.pse.ens.fr/files/Brennan2016.pdf

They Just Get Bigger: How Corporate Mergers Strangle the Economy

Jordan Brennan

Feb 2017

http://evonomics.com/corporate-mergers-strangle-economy-jordan-brennan/

 The Oligarchy Economy: Concentrated Power, Income Inequality, and Slow Growth

Jordan Brennan

April 2016

http://evonomics.com/the-oligarchy-economy/

Declining Labor and Capital Shares

Simcha Barkai

November 2016

 

https://research.chicagobooth.edu/~/media/5872FBEB104245909B8F0AE8A84486C9.pdf

 

Lack of market competition, rising profits, and a new way to look at the division of income in the United States

Nov 2016

http://equitablegrowth.org/equitablog/lack-of-market-competition-rising-profits-and-a-new-way-to-look-at-the-division-of-income-in-the-united-states/

Rising U.S. business concentration and the decline in labor’s share of income

January 2017

http://equitablegrowth.org/equitablog/rising-concentration-declining-labor-share/

 

Concentrating on the Fall of the Labor Share

By DAVID AUTOR, DAVID DORN, LAWRENCE F. KATZ, CHRISTINA PATTERSON AND JOHN VAN REENEN

January 2017

http://www.nber.org/papers/w23108

Declining Competition and Investment in the U.S.

German Gutierrez and Thomas Philippon

March 2017

https://www8.gsb.columbia.edu/faculty-research/sites/faculty-research/files/finance/Macro%20Lunch/IK_Comp_v1.pdf

 

Dynamism in Retreat:  Consequences for Regions, Markets, and Workers

2017

 

https://eig.org/wp-content/uploads/2017/02/Dynamism-in-Retreat.pdf

 

The Oligopoly Problem

 

NewYorker

 

http://www.newyorker.com/tech/elements/the-oligopoly-problem

 

 

DOES INDUSTRY CONCENTRATION MATTER?

John J. Phelan

2014

Journal of Economics and Economic Education Research, Volume 15, Number 1, 2014

 

 

http://www.alliedacademies.org/articles/does-industry-concentration-matter.pdf

 

 

Increased Concentration of Occupations, Outsourcing, and Growing Wage Inequality in the United States

Elizabeth Weber Handwerker

U.S. Bureau of Labor Statistics

April, 2017

 

http://www.sole-jole.org/17733.pdf

 

 

Measuring occupational concentration by industry

2014

 

https://www.bls.gov/opub/btn/volume-3/pdf/measuring-occupational-concentration-by-industry.pdf

 

 

Rising wage dispersion between white-collar and blue-collar workers and market concentration: The case of the USA, 1966-2011,

D. Ilhan

(2017)

 

https://www.econstor.eu/bitstream/10419/162859/1/893982539.pdf

 

 

 

Rising Profits Don’t Lift Workers’ Boats

2016

https://www.bloomberg.com/news/articles/2016-05-05/rising-profits-don-t-lift-workers-boats

Is There a Connection Between Market Concentration and the Rise in Inequality?

 A Firm-Level Perspective on the Role of Rents in the Rise in Inequality

Jason Furman Peter Orszag
October 16, 2015

 

http://gabriel-zucman.eu/files/teaching/FurmanOrszag15.pdf

 Evidence for the Effects of Mergers on Market Power and Efficiency

Blonigen, Bruce A., and Justin R. Pierce

(2016).

https://www.federalreserve.gov/econresdata/feds/2016/files/2016082pap.pdf

 

 

Market Power and Inequality: The Antitrust Counterrevolution and its Discontents

11 Harvard Law & Policy Review 235 (2017)

24 Apr 2016Last revised: 22 Feb 2017

Lina Khan / Sandeep Vaheesan

 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2769132

 

Too much of a good thing

Economist

March 26 2016

https://www.economist.com/news/briefing/21695385-profits-are-too-high-america-needs-giant-dose-competition-too-much-good-thing

 

 The Fall of the Labor Share and the Rise of Superstar Firms

David Autor, MIT and NBER

David Dorn, University of Zurich

Lawrence F. Katz, Harvard University and NBER

Christina Patterson, MIT

John Van Reenen, MIT and NBER

May 1, 2017

https://economics.mit.edu/files/12979

 

 

BENEFITS OF COMPETITION AND INDICATORS OF MARKET POWER

https://obamawhitehouse.archives.gov/sites/default/files/page/files/20160502_competition_issue_brief_updated_cea.pdf

 

 

 Market Concentration Grew During Obama Administration

SAM BATKINS, CURTIS ARNDT, BEN GITIS |

APRIL 7, 2016

 

https://www.americanactionforum.org/print/?url=https://www.americanactionforum.org/research/market-concentration-grew-obama-administration/

 Antitrust, Competition Policy, and Inequality

JONATHAN B. BAKER AND STEVEN C. SALOP

2015

http://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=2474&context=facpub

Horizontal Shareholding, Antitrust, Growth and Inequality

Are US Industries Becoming More Concentrated?

Gustavo Grullon   Yelena Larkin   Roni Michaely

Date Written: April 23, 2017

 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2612047

Horizontal Shareholding

109 Harvard Law Review 1267 (2016)

Harvard Public Law Working Paper No. 16-17    22 Apr 2016

 

Einer Elhauge

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2632024

IS THERE A CONCENTRATION PROBLEM IN AMERICA?

MARCH 27–29, 2017

Conference at University of Chicago / Stigler Center

https://research.chicagobooth.edu/stigler/events/single-events/march-27-2017

 

 

“Reigniting Competition in the American Economy”

Senator Elizabeth Warren

Keynote Remarks at New America’s Open Markets Program Event June 29, 2016

 

https://www.warren.senate.gov/files/documents/2016-6-29_Warren_Antitrust_Speech.pdf

 

 

The Rise of Market Power and the Macroeconomic Implications

Jan De Loecker† Jan Eeckhout‡

August 24, 2017

http://www.janeeckhout.com/wp-content/uploads/RMP.pdf

The Rise of Market Power and the Decline of Labor’s Share

The Financialization of the U.S. Economy Has Produced Mechanisms That Lead Toward Concentration

 June 2017

“No Convincing Evidence That Concentration Has Been a Major Factor in Explaining Poor U.S. Economic Performance”

 March 2017

Economists: “Totality of Evidence” Underscores Concentration Problem in the U.S.

“I Suspect the Major Reason for the Rise in Concentration Is Technological Change, Particularly in IT”

“The Increase in Common Ownership Corresponds to the Concentration Increase That Several Large Mergers Would Create”

Worried About Concentration? Then Worry About Rent-Seeking

“There Is Unambiguous Evidence That Concentration Is on the Rise and Widespread Over Most Industries”

A Second Gilded Age: The Consolidation of Wealth and Corporate Power

AMERICAN CONSTITUTION SOCIETY

JUNE 16, 2017