After having been relatively stable for most of the 20th century, the share of national income going to labour has started being squeezed quite noticeably in the 21st. Even though the economy is growing, workers are getting a smaller share of that growth than the historical norm.
This is true in the United States, and helps explain the rise of Donald Trump, who has spoken directly to the insecurities of the American working and lower middle class. But it is equally true in the rest of the Group of 20 countries, including Canada.
Now this is a complex phenomenon and there are competing explanations for it. The Occupy movement blames the greed of the 1 per cent. Mr. Trump singles out offshoring. Many economists think it is mechanization and artificial intelligence undermining human bargaining power. But a highly plausible new explanation is getting more attention: the increasing concentration of market share in the hands of fewer and fewer companies in industry after industry.
This matters because one of the key disciplines of a market economy is competition. If a company starts to make a profit that is unjustifiably rich, that signals to competitors that the market that company serves is insufficiently competitive. They can capture a share of that market by moving in with innovative products, lower prices, better service or any one of a number of consumer-oriented pitches that end up competing the excess profit away.
That indirectly benefits workers, because lots of companies in a dynamic market increases competition for the people and other resources that companies need to succeed, and gives workers lots of choices as to where to work.
This market discipline only works, however, when there are lots of players and easy entry for new ones. But it appears that the growth strategy of many companies now is to improve their profitability by buying up their rivals, and their market share, and thereby insulating themselves from the market discipline that puts limits on the prices they can charge. This may be decoupling profit from its main justification – meeting consumer needs efficiently – and turning it into a reward for size paid for at the expense of consumers and employees.
That this may be what's happening is given added credence by the fact that it is not just labour's share of national income that is declining, but also investment's. Profit is the share that's growing. That suggests we are seeing a growth in corporate power to raise prices accompanied by weak pressure to raise wages in line with productivity or to invest in innovative products and processes.
Robert Colvile has been a prescient analyst of these trends. As he points out, Glencore controlled, at the time of its IPO, more than half of the global market for zinc and copper; that 81 per cent of the U.S. beef market is in the hands of four giant processing companies; and the global tea trade is controlled by just three firms.
The trend to corporate concentration is also quite marked in high-tech because of network effects. As soon as some critical mass of people uses a tech platform, everyone rushes to embrace it, making it exceptionally hard for competitors to enter the market and compete away high profits.
All this helps to explain why the four biggest firms in a wide variety of industries have increased their market share significantly over recent decades.
If increased concentration is the problem, what is the solution? Despite what Mr. Trump may tell you, it is not protectionism. On the contrary, the whole point of protectionism is to lessen the competitive pressure on domestic companies created by innovative foreign competitors. It raises prices, distorts markets and cuts companies, workers and consumers off from foreign sources of innovation and demand for labour.
Increased corporate taxes won't help because they do nothing to change the balance of power in the business world that is the real issue. If anything, highly profitable megacorporations can better bear high tax and regulatory burdens than smaller competitors and can invest more in sheltering their profits through lobbying and buying political influence.
The only things that are likely to help are in fact free trade and a robust competition policy. Competition authorities in particular need to get a lot more skeptical about proposals for big mergers and lawmakers may need to consider the benefits of the kind of trust-busting that brought to heel the overweening corporate giants of the Gilded Age, as Mark Twain dubbed an earlier period of power imbalance in the economy.
It was another populist Republican, Teddy Roosevelt, who led the charge for such a Progressive agenda then. Its revival only awaits a skilled politician who can connect the dots for people once protectionism's superficial seductive charm once again proves evanescent.