A new International Monetary Fund global study shows that growing market concentration has delivered wins for corporations at the expense of both investment and wages — findings with serious implications for company tax cuts.
The study, released last month, examines thousands of publicly traded companies across 76 economies, examining the extent to which they have increased the gap between prices and marginal costs since 1980 — a key indicator of market power. In advanced economies, firms have been able to increase their mark-ups by 39% across that period, which has coincided with financial deregulation, privatisation and several waves of mergers and acquisitions, including the massive late 1990s wave of M&A activity.
This growth in market concentration and corporate power has had negative consequences for investment: the study shows that there’s a “U-shaped” impact on investment as corporations increase market power: Higher markups are associated with initially increasing and then decreasing investment and innovation rates. The results are strongly significant and robust… The relation between markups and investment and innovation rates is also more strongly negative in industries featuring higher degrees of market concentration.” The more dominant companies are, the less they invest — and that applies to R&D as much as physical capital.
And while more dominant corporations can charge consumers and business customers more, they’re also bad news for workers, because they have greater labour market power and hold down wages more successfully. Using data on industry-level average wages, the study finds “the relation between markups and this measure of the firm-level labor share is generally negative… As the level of market concentration increases, the negative relation between markups and the labor share grows stronger.”
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Australia has witnessed significant increases in market concentration in recent decades under neoliberalism. ACCC chairman Rod Sims addressed the issue in 2016.
The rise of large corporations in the Australian economy has also been substantial. Indeed it seems we have slightly outpaced the US. Analysis prepared by Port Jackson Partners Limited shows the revenue of Australia’s largest 100 listed companies increased from 27% of GDP in 1993 to 47% of GDP in 2015. This compares to the US figures of 33% to 46%.
Sims acknowledged that “over the last 20 or more years, although market concentration has increased in the US and Australia, world poverty has reduced and we have seen living standards increase considerably in developed countries” but nevertheless “mergers resulting in high levels of concentration in markets with substantial barriers to entry will usually reduce competition and cause harm to consumers and our economy.”
The IMF results suggest another factor to be considered in the debate over wage stagnation, especially given, as Reserve Bank governor Philip Lowe has noted, some businesses are complaining about labour shortages but point blank refuse to increase wages to attract talent. Not merely have we allowed corporations to gain market power under neoliberalism, but we have at the same time attacked trade unions and made collective bargaining more difficult — a double whammy for workers looking to have their wages keep up with even low inflation.
The results also suggest the basic rationale for company tax cuts is a furphy. More honest business figures have long been sceptical of the claimed link between company tax rates and investment levels. “The idea that American business is at a big disadvantage against the rest of the world because of corporate taxes is baloney in my view. In the 50s and 60s, corporate taxes were 52%, and we were making all kinds of [job] gains,” Warren Buffett said in 2012. The IMF study suggests that handing a tax windfall to big business as the Turnbull government and the Business Council wants won’t result in greater investment — as market-dominating firms, they don’t feel the need to invest.
That also explains why such a vast volume of the Trump company tax cuts are disappearing into share buybacks and higher dividends — and indeed why Australia’s largest companies like Rio Tinto and ANZ are engaging in share buybacks now, rather than investing spare capital. These giant companies have plenty of spare cash — including from the higher prices they can charge and low wages they can pay thanks to their dominance. They just don’t want to invest it. Australia might have already got whatever benefit there is to be had from company tax cuts by pitching them at small and medium businesses, which are more likely to invest.