Do big companies tend to spend more on capital, while smaller firms spend more on workers?

Source: Massachusetts Institute of Technology (MIT) – It’s one of the biggest economic changes in recent decades: Workers get a smaller slice of company revenue, while a larger share is paid to capital owners and distributed as profits. Or, as economists like to say, there has been a fall in labor’s share of gross domestic product, or GDP.

A new study co-authored by MIT economists uncovers a major reason for this trend: Big companies that spend more on capital and less on workers are gaining market share, while smaller firms that spend more on workers and less on capital are losing market share. That change, the researchers say, is a key reason why the labor share of GDP in the U.S. has dropped from around 67 percent in 1980 to 59 percent today, following decades of stability.

“To understand this phenomenon, you need to understand the reallocation of economic activity across firms,” says MIT economist David Autor, co-author of the paper. “That’s our key point.”

To be sure, many economists have suggested other hypotheses, including new generations of software and machines that substitute directly for workers, the effects of international trade and outsourcing, and the decline of labor union power. The current study does not entirely rule out all of those explanations, but it does highlight the importance of what the researchers term “superstar firms” as a primary factor.

“We feel this is an incredibly important and robust fact pattern that you have to grapple with,” adds Autor, the Ford Professor of Economics in MIT’s Department of Economics.

The paper, “The Fall of the Labor Share and the Rise of Superstar Firms,” appears in advance online form in the Quarterly Journal of Economics. In addition to Autor, the other authors are David Dorn, a professor of economics at the University of Zurich; Lawrence Katz, a professor of economics at Harvard University; Christina Patterson, PhD ’19, a postdoc at Northwestern University who will join the faculty at the University of Chicago’s Booth School of Business in July; and John Van Reenen, the Gordon Y. Billard Professor of Management and Economics at MIT.

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