Alright it’s that time again

NEW WORKING PAPER

“Common Ownership and the Corporate Governance Channel for Employer Power in Labor Markets”

https://marshallsteinbaum.org/assets/common-ownership-labor-market-power-antitrust-bulletin-invited-submission-.pdf
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In this paper, I basically say a number of the things I've had in mind over the past few years, answered questions and contributed to ongoing debates related to corporate governance, common ownership, employer power in labor markets, and the antitrust implications of it all.
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Thank you to the editors of the special issue of Antitrust Bulletin on common ownership who asked me to contribute a piece on labor: @martincschmalz, @elhauge, and Sumit Majumdar.
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I'll run through a few points in this thread. First of all: what do "we" think about corporate governance's role in the macroeconomic rise of market power? I think it's highly significant.
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The concentration of power between firms is both caused by and causes the concentration of power within them. And the shift to shareholder-first corp. governance invites acting on incentives to be anti-competitive.
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In economics, the information theory revolution that justified shareholder-first governance happened in the 80s, and with somewhat distinct personnel, from the Chicago revolution in antitrust that took place from the 50s-70s. But they are of a piece.
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The basic idea was that there's a principal-agent problem between shareholders and managers, and the way to solve that problem is to turn managers into capitalists (as @rortybomb once memorably said at the Ford Foundation, the v. first time we met I believe).
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( @JWMason1 was presenting his great paper "Disgorge the Cash," which I can honestly say had a profound effect on my life, including the paper I'm discussing now.)
http://jwmason.org/wp-content/uploads/2015/05/Disgorge-the-Cash.pdf
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The revolution in corporate governance had several concrete policy effects:
1. Legalization of buybacks.
2. Financial deregulation enabling the origination of junk bonds.
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3. Exemption of "performance-based" CEO pay from the cap on executive compensation deductible from corp. profits tax.
4. Growth of the "activist" hedge funds that foreground disciplining management to achieve higher returns for shareholders.
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5. Private equity just basically is the apotheosis of this entire idea, because it combines shareholding and management within itself and dispels with any concern for "regulation" that comes with public equity markets & 'outside' shareholders.
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ALL OF THIS WAS BASED ON THE ASSUMPTION THAT OUTPUT MARKETS ARE COMPETITIVE.

Like, that's a pretty big problem for a revolution in corporate governance.
( @joseazar & @martincschmalz have shown this in their work.)
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So what happens if... they aren't? The phenomenon of common ownership is the phenomenon of companies maximizing portfolio-level profits rather than firm-level ones, which entails cartelization, not competition.
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[formally, @joseazar has them maximizing shareholder utility in his paper with Vives forthcoming from Econometrica.]
https://www.econometricsociety.org/system/files/17906-3_0.pdf
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In addition to this discussion of the economic theory of shareholder primacy, I also discuss its history & intellectual history: what this is pushing back on is the managerial corporation, with management answerable to multiple parties, including workers.
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The reason for the intellectual revolution in economics was the perception, borne of staglation, that managerial corporations instantiated wage-price spirals in themselves.
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*stagflation

We have to understand the managerial corporation as the creation, in part, of robust antitrust, both in what business models were allowed and what managers were allowed to do with operating profits.
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90% marginal tax rates took dividends off the table. Buybacks were illegal. Vons Grocery and Brown Shoe were de facto horizontal and vertical merger bans, respectively.
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Under those circumstances, a conglomerate merger (legal) was a de facto dividend paid out in shares of stock, and therefore not taxed. So we got those, plus wage increases, plus robust-er supply chains. There you have the mid-century managerial corporation.
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The corporate governance revolution went to war against this reality, in which the owners of capital are denied or kept distant from the profits that the corporations they own generate. And common ownership/private equity/shareholder control in all its forms negates that.
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As I said in the theory discussion above, common ownership is what increases profits for shareholder-responsive corporations, and in so doing, shifts power within those corporations away from workers and toward shareholders. Which brings me to... labor market power.
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Part II of the paper discusses the empirical claim that employer market power in labor markets has risen. That territory has already been covered in many ways, but I want to push back on two prominent critiques. Let's call them "superstar firms" and "worker bargaining power."
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In each case, there's a representative paper I take on. For superstar firms, it's "The Fall of the Labor Share and the Rise of Superstar Firms," published this year in QJE but circulating for the last few. In short, I think it gets the story seriously wrong.
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This is a macro story that comes from the micro fields of Industrial Organization & International Trade, and specifically their shared literature on firm heterogeneity. Firms have an idiosyncratic productivity draw (for using a single labor input) and face some demand curve.
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More productive firms are larger and enjoy a higher markup. The paper seeks to hit an unusual trifecta: rising concentration, rising markups, and rising competition.
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This departs from antitrust/IO tradition, which would distinguish between pro-competitive and anti-competitive concentration by looking at markups (or prices), going back to Demsetz.
https://www.journals.uchicago.edu/doi/10.1086/466752
[fyi he was a creep, as we learned at his death a few years back]
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The superstar firms account works as follows: you get higher concentration from an increase in competition that favors more productive firms. So far, that looks like Demsetz, Jovanovic, Hopenhayn, Melitz, etc etc.
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You had that in the 2017 working paper version. The problem is that it predicts falling aggregate markups, which is not consistent with another QJE paper: "The Rise of Market Power and the Macroeconomic Implications."
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In a firm heterogeneity model, you get two effects trading off: production reallocates from low-markup to high-markup firms, but all firms lose pricing power, b/c that's the driving force behind the consolidation. The latter effect dominates in aggregate markup dynamics.
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[This is basically Melitz and Ottaviano 2008, which the 2017 working paper is closest to, in terms of antecedents in the IO/trade literature.]
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So how do you get aggregate markups to go up in a model like this? The first (reallocation) effect has to dominate in aggregate. The way to do that is to make the "good" firms really, really, really good.
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So the firm-level productivity distribution is made *more skewed than Pareto*. Studiers of firm-level productivity can make of that what they will. Phillipon & Gutierrez have a recent paper that suggests the firms we normally think of as superstars... aren't that good.
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A few further problems: the as the previous discussion suggests, the superstar story relies a great deal on **reallocation**: an increase in competition causes production to reallocate to superstars.
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Insofar as IO has studied the effect of competition on firm-level productivity, reallocation does not appear to be important. Here I'm referring to Backus 2020 (also QJE!)
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Finally: the superstar firm approach has to assume that input markets are competitive. They predict a declining labor share b/c production is reallocated to high-markup firms, where, by definition, workers get less.
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A perfectly competitive labor market is inconsistent with a whole host of facts of which we are certain:
1. firm-level wage-setting. Can't happen in the superstar story; all workers earn the same regardless of which firm they work for.
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2. Stagnant wages. The superstar story predicts rising wages, even though the labor share declines, because workers are working at more productive firms, and they must be paid their MPL, which thereby increases.
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3. Declining labor market mobility. The superstar story predicts it must be rising: production is reallocating from low-markup to high-markup firms, so, workers must be as well. But you see the opposite in the labor data.
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As you can probably gather, I don't think much of the superstar firms theory. The authors of that paper say it's consistent with the fissured workplace and rising firm-level wage determination, but it very clearly is not.
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Getting to theory 2, "worker bargaining power," here I'm responding to the paper "The Declining Worker Power Hypothesis" by @annastansbury & Summers. I think this is much closer to the mark, but still has some issues.
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These authors posit that labor markets are not competitive. But unlike the "employer power" story, here the claim is that workers are paid *more* than their marginal product, but that the time trend is a decline in this premium.
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That is consistent with many things we know about how labor markets work and how they've evolved. Summarize it by "things have gotten worse for workers." True.
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The authors further claim that a decline in the NAIRU (colloquially, the unemployment rate when wages are rising/the economy is at Full Employment) is consistent with the decline in worker power but not an increase in employer power. I disagree.
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I *think* it's consistent with both, but I admit this is the part of the paper I'm least sure about. Under monopsony, *individual firms* employ fewer workers than they would if labor markets were competitive, BUT overall employment may be higher.
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Workers are more desperate for jobs and agree to take lower wages, which incentivizes firms to create (bad) jobs. In fact I think one of the reasons the macro labor debate has moved from skills gaps and such to monopsony is the combo of low unemployment/stagnant wages.
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So my view is that "declining NAIRU" doesn't rule out increasing employer power in favor of decreasing worker bargaining power. But again, this is the part I'm least certain about.
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One thing I'm more certain about is one aspect of declining worker bargaining power that fails on its own: that theory would predict more job creation in a wage posting or search and matching model with Nash Bargaining.
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If what employers get out of any given match goes up, a free entry condition in a model like that will require that more jobs be created in order to drive the return to job-posting back down. And we know that job creation has gone down. That means free entry fails.
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And free entry failing is another way of saying the labor market has a market power problem: vacancies that are profitable to post aren't being posted. So I think, somewhere in there, you need rising employer power. But I think there's more than enough room for both.
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Crucially, "rising employer power" & "declining worker power" formally both depend on the existence of MPL, with wages either above or below it. But DOES IT REALLY EXIST? Maybe workers are just paid whatever they can get, and MPL isn't a concept with any empirical relevance.
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Shocking, I know. Anyway, hopefully this adds to the debate on the causes of various labor market trends.
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Finally, part III actually puts these two things together, or tries to. It also looks for the type of antitrust-relevant fact pattern that might motivate a case.
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We've got plenty of examples of shareholders demanding that workers be screwed in order for shareholders to get more money. But how about shareholders inducing managers at portfolio firms to act anti-competitively against workers in labor markets?
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My favorite example, as usual, is the gig economy. At a facile level, it's an easy one, because each platform is itself multiple firms! Thanks misclassification.
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But then we've also got Softbank orchestrating stock swaps betw multiple gig platforms it owns. This is reducing inter-platform competition, at the behest of shareholders to increase profits. And the way gig economy firms make $$ (if they ever do) is by exploiting workers.
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Creating one platform per market segment per country (or even world region) is a good idea because it reduces labor market competition and makes it possible for each of those platforms to actually turn a profit.
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One last point (this thread is taking longer than the paper took to write): there's no way to get an antitrust remedy off the ground under the consumer welfare standard.
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This is an annoying claim that continues to bubble up here and elsewhere: antitrust already protects competition in labor markets. Absolutely not.
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I cite @TedTatos on the NCAA cases, @hibahafiz's paper on the subject of antitrust and labor, and other instances to show that the consumer welfare standard invites the exploitation of employer monopsony power. It constantly excuses it on the grounds that consumers benefit.
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Regardless of whether consumers benefit from exploiting workers (doubt it), so long as antitrust believes that, and that consumer welfare trumps, there's no hope of an antitrust case foregrounding harm to workers succeeding in court.
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And that, for once, is all I have to say.
/fin

Oh: I've tagged a number of the great scholars I've cited already in this thread. Some more: @Nacho2G @LilyPurple311 @linamkhan @brian_callaci @kathrynholston @profsheena @i_herrera_a @kaleidoscomp @arindube @snaidunl @mioana @hshierholz @joshbivens_DC @Simon_Mongey