Winners take all (the most): The effects of market concentration on labor share and wage inequality

The increase in market concentration in the major advanced economies in recent decades has led to an exhaustive analysis of its implications. One of them is that it may explain the fall in labor share. This is explained, according to one theoretical strand, by the emergence of highly efficient superstars firms with low levels of labor share that, due to reallocation effects as they gain very large market share, depress aggregate labor share. In turn, wage inequality between workers with different skills may also increase because superstars firm may demand highly skilled workers. Thus, this paper investigate the effects of market concentration on the labor share and on the highly skilled worker share in the wage bill in the Chilean manufacturing. The results indicate that an increase in concentration is associated with a fall in labor share and a increase in the share of the wage bill that is paid to highly skilled workers. Moreover, those industries with the largest increase in concentration are those with the largest drop in labor share and the largest increase in the highly skilled worker share in the wage bill. However, the small group of large companies that dominate the industries are far from being superstars: they have not become more productive and more innovative and their contribution to aggregate productivity and employment has not increased over time. On the contrary, they charge a higher markup than the rest of firms. The findings shows that increases in market concentration may be detrimental to the economy as dominant firms polarize the labor market, do not contribute to increases in productivity and innovation and exert market power.