In this short review, Dustin Voss of the London School of Economics points out that monopolistic superstar firms tend to extract profits rather than to invest them into workers’ salaries and benefits or capital.

Corporate mergers are often painted as welcome happenings. Larger, more successful companies buy smaller ones to bolster their efficiency and infect them with a more productive corporate culture. Efficiency gains should translate into increased productivity and ultimately into growing profits which then are reinvested in company capital and also distributed to employees. As long as a certain degree of fruitful competition remains, the pros should prevail.

But as enlightening research by American economist Simcha Barkai indicates, portraited in a recent article on VICE, this common trickle-down effect fails to materialise. Rather, Barkai finds that as corporations get bigger, the labour share in the non-financial corporate sector (encompassing 80 million (!) workers), declines significantly. Today, on average 10 percent fewer company profits are going to labour as compared to 30 years ago.

What could explain this remarkable drop? The most prominent story goes like this: Digitalisation and increased automation mean that more efficient machines and robots are taking the jobs. Fewer jobs mean less investment in wages and benefits which are comprised together in the labour share. But if this explanation would hold, all other things equal, we should observe roughly an even trade-off between labour share and capital investment. However, most notably Barkai finds no such trade-off. Actually, he observes an even more significant drop in capital share (-30%) as compared to labour, while overall profits remain steady on the rise.

So, where’s all that money going? Company concentration and increased merger activity seem to be the problem. After all, the trend of decreasing labour and capital shares are significantly more prominent in companies facing less competition. Here it seems much easier for capital to extract profits instead of reinvesting them for more competitive means. Firms facing challenging competition in more dynamic markets can’t afford such behaviour. Thus, Barkai crucially reminds us that corporate concentration does not only hamper competition and influences price setting, but also reduces firm investment, undermines efficiency, and leads to increased inequality between capital and labour.

Against these findings, the question that managers of superstar firms in the non-financial corporate sector should probably ask themselves is who will pay for the products they’re producing at the end of the day, if the labour share of their own employees keeps falling and falling.

Dustin Voss is an entering PhD student in the European Institute of the London School of Economics.