Short Take

Largest Firms' Stock Gains Skew Big Picture on Worker-Owner Income Division

Wealth inequality has been a particularly hot topic ever since Thomas Piketty provided data suggesting that investors take an increasingly large portion of the world's wealth from workers. Capital in the Twenty-First Century, the 2014 book that outlines Piketty's research, resonated with those who had been arguing for many years that the rich were getting richer at others' expense.

But new research concentrating on company-level data suggests that the wealth gap Piketty describes might not be as unequal as it appears, with investor gains in share of wealth, versus that of workers, more pronounced at very large companies. At the average public company, labor's share of income grew between 1960 and 2014, even in the later decades when wages were more stagnant, suggest findings in a working paper by UCLA Anderson's Barney Hartman-Glaser, Stanford University's Hanno Lustig and Mindy Z. Xiaolan of the University of Texas, Austin.

The differences in findings lie in the working paper’s analysis of firm-level data, as opposed to national aggregate data used by Piketty and many follow up studies. Although labor’s overall portion of GDP has declined steadily, the average worker’s share of wealth at individual public companies has risen, according to Hartman-Glaser and colleagues.

Rising idiosyncratic risk is likely responsible for most of the decline in labor income at the national level, the study indicates. Idiosyncratic risk is firm-specific, as opposed to factors that affect all businesses in an economy. Hartman-Glaser offers the example of Uber's leadership trouble as idiosyncratic. Low consumer spending, which hurts many types of companies, is an aggregate risk. The working paper cites recent studies showing a sharp rise in idiosyncratic risk generally.

The study measures and calculates total value added (profits, labor payments and capital improvements) at individual public companies. The authors track how each split its added value between owners and wage earners as it grew, shrank or struggled. The study finds that the bigger companies had the largest shares of value added going to owners.

Huge gains by investors at very large corporations, such as Apple, Alphabet (Google's parent) and Amazon, likely explain the aggregate data used by Piketty and others, the study finds. At enormously successful companies, gains-to-investor portions of value added have far outpaced those of wage-earning employees, according to the study. The sheer size of the value added by these companies (productivity at a few very large companies greatly impacts overall GDP) helps reverse the trend seen at the firm level, the authors suggest.

The vast majority of public companies are not very large or anywhere near as successful as Alphabet, Hartman-Glaser explains. They include many companies that are only marginally profitable, as well as money-losing firms that have little, if any, left over to give to owners. These firms drive up the average labor share.

Forty years ago, there was no relationship between the size of the firm and the division of value added between owners and wage earners, the study finds. The trend, and the related divergence between aggregate and average shares, point to rising idiosyncratic risk as a key factor to consider when measuring wealth inequality, the authors contend.

Hartman-Glaser, B., Lustig, H., & Xiaolan, M.Z. (2107). Capital share dynamics when firms insure workers. NBER working paper series. [Abstract]

Barney Hartman-Glaser

Assistant Professor of Finance

Barney Hartman-Glaser’s research applies contract and game theory to financial and real estate markets. He has conducted research on the consequences of private information in mortgage markets in which he showed that mortgage-backed securities issuers may cash in on their reputations by selling low-quality assets. He has also written on the incentives of mortgage originators to screen for good borrowers.

 

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