Is monopoly power one of the reasons that the equity markets remain high nearly 10 years into a bull market? It is something I have begun to wonder about recently, since a lack of wage inflation is a key reason that the Federal Reserve is not moving faster to raise interest rates. A rate rise off the back of inflation is one of the most reliable ways to pop a market bubble. Yet many economists believe that one of the reasons that wage growth — a typical driver of inflation — remains relatively flat despite unemployment being at nearly pre-crisis lows is because of job-disrupting technology itself.
There are a few sectors, like finance and information technology, which have seen strong wage growth. Yet they create relatively few jobs. Finance takes 25 per cent of all corporate profits while creating only 4 per cent of jobs, since it sits at the centre of the dealmaking hourglass, charging whatever rent it likes. Meanwhile, wealth and power continue to flow into the technology sector more than any other — half of all American businesses that generate profits of 25 per cent or more are tech companies. Yet the tech titans of today — Facebook, Google, Amazon — create far fewer jobs than not only the big industrial groups of the past, like General Motors or General Electric, but also less than the previous generation of tech companies such as IBM or Microsoft.
What’s more, it is not just the top sectors that control the majority of corporate wealth, but the top companies themselves. The most profitable 10 per cent of US businesses are eight times more profitable than the average company. In the 1990s, that multiple was just three. Workers in those super profitable businesses are paid extremely well, but their competitors cannot offer the same packages. Indeed, research from the Bonn-based Institute of Labor Economics shows that the differences in individual workers’ pay since the 1970s is associated with pay differences between — not within — companies. Another piece of research, from the Centre for Economic Performance, shows that this pay differential between top-tier companies and everyone else is responsible for the vast majority of inequality in the US.