A second line of research shows the flip side of rising corporate market power: the weakening of workers’ bargaining position. Since 1980, labor’s share of the US economy has fallen by about 5 percentage points. The plunge was faster in industries that experienced more concentration, where large superstar firms such as Google, Apple, Amazon, and Walmart grew the most—as documented by the Massachusetts Institute of Technology’s David Autor and his research partners.
Third, there has been a secular decline in business-to-business reallocation since the late 1980s, as shown in a series of papers by John Haltiwanger and other researchers. This suggests that the process of workers moving from declining to expanding businesses is not as fluid and dynamic as it once was.
These patterns are consistent with the view that creative destruction has been decreasing and that business dynamism and aggregate productivity growth fell as a consequence. If incumbent businesses face less competition from entrants, they have an easier time building a dominant market position. This allows them to expand markups, profit margins, and (eventually) corporate valuations. Because higher profits cut into the share of output paid to workers, a shrinkage in labor’s share of the economy will ensue, especially in the most concentrated industries.
Fundamental causes
Even if one were convinced that the productivity slowdown and the decline in business dynamism were driven by a fall in creative destruction, the main question is, Why? Answering this question is particularly important for policymakers seeking clues as to what they can do to reverse these trends.
Researchers have considered four broad explanations:
- The advent of information technology and resulting economies of scale
- Changes in the process of knowledge diffusion
- Demographics and falling population growth
- Changes in policies, such as regulatory entry costs or tax incentives for research and development
While these explanations are not mutually exclusive—and presumably are all relevant in the real world—it is useful to discuss them separately.
IT and economies of scale: In discussing the productivity dynamics of the 1980s and 1990s, the advent of IT is the elephant in the room. Could the availability of such technologies have caused the decline in dynamism and the peculiar boom-bust shape of productivity growth? Two recent papers argue that the answer is yes and that economies of scale play an important role. French economist Philippe Aghion and his research collaborators (2023) posit that advanced IT makes it easier for businesses to scale their operations across multiple product markets. The London School of Economics’ Maarten De Ridder (2024) argues that IT allows enterprises to reduce their marginal costs of production at the expense of higher fixed costs.
What these explanations have in common is that the adoption of such technologies is particularly valuable for productive companies. This implies that such businesses took advantage of IT developments in the late 1980s and early 1990s, and the economy experienced an initial productivity boom. More surprisingly, the researchers argue that the existence of these megabusinesses can have dynamic costs in the long run. If new businesses (such as a new IT start-up) expect that they will have a hard time competing with existing enterprises that produce at scale (such as Amazon, Microsoft, or Google), their incentives to enter the market shrink. As a result, overall growth and creative destruction can decline, and incumbent companies benefit by charging higher markups.
Changes in knowledge diffusion: A separate strand of research suggests that the process of knowledge diffusion among businesses has changed in fundamental ways. In particular, the argument goes, in recent decades technologically lagging companies had a harder time adopting technologies of competitors at the productivity frontier. This change could be technological in nature: companies such as Google or Apple may be so technologically advanced that adoption simply becomes impossible for smaller rivals. At the same time, it could also have legal origins, as large businesses increasingly engage in defensive patenting to protect their technological lead by creating a dense, overlapping thicket of patents. Consistent with this hypothesis, Ufuk Akcigit and Sina Ates (2023) document a substantial rise in the concentration of patenting among superstar firms and estimate that changes in technological adoption can explain why dynamism has declined, why incumbent enterprises enjoy noncompetitive rents, and why productivity growth has fallen.
Slowing population growth: While those explanations link changes in creative destruction and slower productivity growth firmly to changes in the technological environment, some recent papers advance an entirely different explanation. These researchers argue that both the slowdown in productivity gains and the decline in dynamism reflect falling US population growth.
Expansion of the US population has plunged since the 1960s and has reached a historic low in recent years. That falling population growth should lead to falling productivity growth is the hallmark of most theories of economic expansion. My colleague Conor Walsh and I showed in 2021 that slowing population growth also reduces creative destruction and business dynamism by causing a decline in the entry of new businesses. Other researchers have compiled direct empirical evidence on the relationship between population growth, the rate of new business formation, and the resulting process of business dynamics.
Policy changes: Finally, one could think of many changes in policies that could have triggered a decline in business creation and consequently a decline in growth, creative destruction, and dynamism. Examples are changes in regulation, such as licensing requirements; R&D subsidies that benefit incumbents rather than potential entrants; and changes in corporate taxes.
While such policies might be important for specific industries, it seems unlikely that they would offer a significant explanation at the aggregate level. Recent research shows that the observed changes in such policies cannot quantitatively account for the productivity slowdown and the decline in dynamism. More important, the productivity slowdown and the decline in dynamism are not exclusively US phenomena. They also occurred to varying degrees in most developed economies.
Occam’s razor
The 14th century principle of Occam’s razor—that the simplest explanation is the most likely—suggests focusing on changes that occurred globally rather than policy changes specific to the US. The development of advanced information technology and declines in population growth fit that bill and are most likely to have played an important role in the drop in business dynamism and the slowdown in productivity growth.
Those developments also highlight the potential for specific policies to counter these trends. With respect to changes in demographics, policymakers around the world are already acutely aware of the rising costs of aging populations. While this debate centers mostly on concerns about fiscal sustainability, the economic consequences could be much more pronounced if falling population growth indeed leads to falling productivity growth. Given the limited success of policies to reverse declining fertility, the main policy lever available in the short to medium term is likely to be immigration policy.
By contrast, the policy options related to the ramifications of the IT boom are more specific and arguably directly related to antitrust enforcement. If information technologies indeed caused the increase in concentration, with adverse consequences for productivity growth, the rise in market power harms consumers not only through higher prices but also through slower innovation and growth. This, of course, raises the stakes of competition policy because how to counter the growth slowdown is, quite literally, a trillion-dollar question for policymakers.
