Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / Why Big Firms Steal the Productivity Gains
Transcript
- Lucas: You know that feeling when you read an earnings report and a company posts record profits, but the employees are still fighting for a two percent raise? That disconnect has a name, and it's not just anecdotal. Luna: You're talking about the superstar firm effect, right? The idea that a small number of companies capture a huge share of the productivity gains. Lucas: Exactly. It's one of the most striking patterns in modern economics. Researchers at the London School of Economics and the OECD — folks like David Autor and Anna Valero — have been tracking this for years. And the data is pretty stark. The gap between the most productive firms and everyone else has been widening since the early 2000s. Luna: So when we talk about the productivity slowdown, it's not that every firm is stagnant. It's that the leaders are sprinting while the pack is walking. Lucas: Right. And that divergence shows up in a few concrete numbers. The top ten percent of firms in the U.S. are now about twice as productive as the median firm, and that gap has grown by something like forty percent over the past two decades. Luna: That's huge. So what's driving it? Is it just technology? Lucas: Technology is a big part, but it's not the whole story. The superstar firms are disproportionately in tech-intensive sectors like software, pharmaceuticals, and finance. They're also more likely to hold patents, invest in R&D, and adopt new management practices. But the puzzle is why the laggards aren't catching up. Luna: I remember reading that the diffusion of technology from frontier firms to the rest has actually slowed. It used to take about five years for a new technology to spread, now it's more like fifteen or twenty. Lucas: That's the worrying part. We used to think of productivity as a rising tide that lifts all boats. But now it's more like a few luxury yachts and a lot of dinghies. And the question is: why? Luna: Well, one reason could be market power. The superstar firms can use their scale to invest in even better tech, and that creates a moat that keeps competitors out. Lucas: Exactly. There's a growing body of research that links the rise of superstar firms to increasing market concentration. In the U.S., the average industry has seen the market share of its top fifty firms climb from about twenty-eight percent in 1990 to over thirty-five percent today. And that concentration gives them pricing power, which shows up in higher markups. Luna: Higher markups mean more profits, but not necessarily more jobs or higher wages for the workers at those firms. Lucas: That's the rub. The superstar firms are extremely productive, but they're also increasingly 'winner take most.' They generate a lot of output with relatively fewer workers. The labor share of income in the U.S. has fallen from about sixty-five percent in the 1980s to around fifty-seven percent today. And a big chunk of that decline is attributed to this superstar effect. Luna: So the gains from productivity are going to capital and to a small group of highly skilled workers, but not to the typical employee. Lucas: Right. And that has big implications for inequality and for the overall health of the economy. If the typical worker doesn't see their income rise, consumer demand can lag, and that can feed back into slower growth. Luna: But hold on — is this really a new phenomenon? I mean, there have always been dominant firms, like Standard Oil or U.S. Steel. Lucas: True, but the scale and the pervasiveness are different. Today's superstars are not just in oil or steel — they're in software, retail, finance, even healthcare. And they're more global, more intangible-intensive, and they're growing faster. What's new is that the economy seems to be sorting into these two tiers, and the gap is widening. Luna: So what does this mean for the average worker? If you're not at a superstar firm, are you just stuck with lower productivity and lower wages? Lucas: That's the big policy question. Some economists argue that we need stronger antitrust enforcement and policies that encourage knowledge spillovers. Others say we should focus on education and training so workers can move to the superstar sectors. But there's also a more radical idea: what if we made it easier for new firms to challenge the incumbents? Luna: You mean reducing barriers to entry? Like deregulation or improving access to capital? Lucas: Yeah, and also thinking about the rules of the game. For example, the decline in new firm entry — the rate of new business formation has been falling for decades. In the late 1980s, about ten percent of firms were new each year. Today it's closer to seven percent. And new firms are the ones that often bring radical innovations. Luna: So we're not just losing productivity, we're losing the dynamism that creates the next superstar. Lucas: Exactly. And there's a real risk that we end up with an economy where a few giants do very well, but the rest of us are stuck. That's why this topic matters beyond the wonky economics. It's about whether the fruits of progress are shared. Luna: Speaking of sharing — this is exactly the kind of episode that makes people think. And if you're one of those listeners who gets value out of what we do here, maybe consider supporting the show. A couple of dollars a month genuinely keeps these episodes ad-free. You can find us at buy me a coffee dot com slash fexingo. Lucas: And that really does make a difference. Every little bit helps us keep digging into the data and bringing you these conversations. So thank you to everyone who's already supported us. Luna: Now, where were we? Right — the policy response. Lucas, you mentioned that some economists are pushing for stronger antitrust. But isn't the evidence on that mixed? Lucas: It is. There's a classic argument that monopoly power is bad for consumers and innovation. But some research suggests that the superstar firms are more productive precisely because they have scale, and breaking them up could actually hurt productivity. The truth is, it depends on how they got their market power. Luna: So if they're big because they're better, that's one thing. If they're big because they're stifling competition, that's another. Lucas: Right. And that's why the evidence on merger policy is so important. There's a study that looked at mergers in the U.S. over the past twenty years and found that they tend to increase productivity at the combined firm, but they also reduce employment and increase markups. So the net effect on the economy is ambiguous. Luna: I'd love to see some real-world examples. Like, when did a country successfully boost productivity in the laggard firms? Lucas: Well, there's the interesting case of Germany's Mittelstand — those mid-sized manufacturing firms that are often family-owned. They've managed to stay competitive by investing heavily in apprenticeships and niche technologies. Their productivity is much closer to the frontier than the average U.S. firm, and they've been able to maintain a strong export base. Luna: But didn't Germany face its own productivity slowdown in the 1990s after reunification? Lucas: They did, but they also went through painful labor market reforms in the early 2000s that made it easier for firms to hire and fire. And those reforms, combined with a focus on innovation, helped them regain competitiveness. The lesson isn't simple, but it shows that policy can matter. Luna: So what about the role of digital technology? Is there a way to make sure that AI, for example, helps the laggards rather than just empowering the superstars? Lucas: That's the million-dollar question. There's a lot of hope that AI could be a general-purpose technology that lifts everyone. But the evidence so far is mixed. For example, a recent study on AI adoption in manufacturing found that the biggest gains went to firms that were already using data and had the skills to integrate AI. The others got almost nothing. Luna: So it's not just about having the technology, it's about having the complementary capabilities. Lucas: Exactly. That's why policies that support training and technology adoption are so important. There's also a role for public investment in research and development, especially in areas that might not have immediate commercial applications but could benefit everyone. Luna: Like the internet? Or GPS? Lucas: Precisely. Both of those were originally government projects, and they ended up powering productivity growth across the whole economy. But public R&D spending as a share of GDP has been falling for decades, and that could be another reason why we're stuck with a two-tier system. Luna: So let me see if I can sum up what we've been saying. The productivity slowdown isn't uniform — it's a divergence. Superstar firms are doing great, but the rest are falling behind, and that's hurting the average worker and the economy's dynamism. Lucas: That's the core. And the causes are a mix of technology, market power, and policy choices. There's no single silver bullet, but a combination of antitrust enforcement, public investment, and support for new firm formation could help. Luna: I still wonder — is it possible that we're just in a transition period? Maybe AI will eventually spread and narrow the gap. Lucas: It's possible. But the longer the gap persists, the harder it becomes to close. And if we just wait and hope, we might end up with an even more divided economy. I think the takeaway is that we need to be intentional about how we manage these changes. Luna: Well, I'm glad we could dig into this. It's a complex issue, but understanding it is the first step to fixing it. Lucas: Absolutely. And that's the kind of thing we'll keep exploring on this show. Thanks for listening, and we'll see you next time.