WINNER TAKE ALL?
However, technology has also changed the organization of the economy. A lot of the most successful inventions that came out of the high-tech revolution were “winner take all” products; there was no point in being on Myspace when the whole world was on Facebook, and Twitter is meaningless unless someone is retweeting your tweets.
Technological innovations have also transformed existing industries, and created large benefits from being connected to industries where they used to be largely absent, like hospitality or transportation. For example, if drivers know that all passengers use a particular ride-sharing platform, they will choose to stay on that one. Conversely, if passengers know that all drivers use a particular platform, that is where they will go. These network effects explain in part the dominance of giant tech companies like Google, Facebook, Apple, Amazon, Uber, and Airbnb, but also of “old economy” behemoths, such as Walmart and Federal Express. In addition, the globalization of demand has increased the value of brands, as rich Chinese and Indian customers can now aspire to the same goods. And the ability to browse, compare, and boast on Facebook has made consumers more aware of differences in prices and quality, but also more sensitive to fads.The result is a winner-take-all (or if not all, most) economy, in which a few firms capture a large part of the market. As we saw in the chapter on growth, in many sectors sales have become more concentrated, and we see the increasing dominance of “superstar firms.” And in sectors that have become more concentrated, the share of revenues going to pay wages has gone down more. This is because those firms, which are monopolies or near monopolies, make more profits, and those tend to be distributed to shareholders. The increase in concentration thus helps explain a part of why wages are not keeping pace with GDP.39
The rise of the superstar firms also offers an explanation for why overall wage inequality has been rising: some firms are now much more profitable than others and they pay higher wages.
It is also true that profitability is more variable than it used to be, with more clear winners and clear losers, even outside the set of superstars.40 In fact, in the United States, the increase in inequality between the average salaries at different companies can explain two-thirds of the overall rise in inequality (increase in inequality between workers within the same company explains the rest). A lot of this increase in inequality between firms seems due to changes in who works where; the highest-paid workers in low-paying firms are moving to those that pay more. If one assumes that higher earnings reflect higher productivity (which is probably true on average), then the more productive workers are increasingly working with other high-productivity workers.41This is consistent with a theory in which superstar firms attract both capital and good workers.42 If more productive people benefit more from being paired with other productive people, then the market should drive such people to come together to form high-productivity firms that would, as a result, have higher wages and salaries than other firms. Moreover, once a firm has invested in a galaxy of talents, the CEO of such a firm is in a position to make a big difference; if he pushes them down the wrong path, he would waste a whole lot of productive capacity. Therefore, such firms should strive to get the best CEO possible even if that requires paying him or her what some may feel is an obscene salary.43 The rise in top incomes, in this view, is just the flip side of the rise of superstar firms that value getting the best top management and are willing to pay a lot for them.
That the economy is sticky also contributes to the rise in inequality between firms. As production in some sectors gets concentrated in superstar firms, other firms in those sectors all over the country are shutting down (think the local department store versus Amazon), in addition to those that shut down because of the effect of new technology or trade.
Since workers do not move out, wage growth in the affected area flattens or gets reversed, and rents do the same. This is good news for the surviving firms in those pockets, especially if their clients are elsewhere. The resulting windfall in profits may lead to greater investment in these companies, but probably not enough to halt the overall decline of the area. In other words, part of the distinction between good firms and bad firms may be purely happenstance. If you are a firm in a failing local economy lucky enough to be able to continue to sell to the national or world economy, you can do very well, at least for a while, until the overall drain in talent from these places, as the young and the ambitious move out, starts to hurt.In other words, globalization and the rise of the infotech industry, combined with the sticky economy, and no doubt with other important but perhaps more local changes, created a world of good and bad firms, which in turn contributed to an increase in inequality. In this view, what happened may have been unfortunate, but it probably could not have been stopped.