Firms’ size and labor markets

The “scale without mass” phenomenon

In this paper, Brynjolfsson et al. examine the impact of Information Technology (IT) investments on the size, profits, and employment of firms. They use detailed micro-level data from 2004 to 2013, derived from a representative sample of U.S. firms based on administrative data from the U.S. Census Bureau. Their findings include:

• Increased IT intensity, defined as IT investment per employee, is associated with larger firm sizes. On average, the authors find, that every additional $60 expenditure in IT per worker is associated with an increase of two employees per firm and an increase of $1 million in revenue. In addition, when a firm increases its IT intensity, its market share tends to expand, whether measured by employment or by revenue.
• Enhanced labor productivity enables firms to increase sales without proportionately hiring more labor, aligning with the “scale without mass” hypothesis. In particular, Brynjolfsson et al. find that a 1% increase in IT intensity is associated with a 0.1% decline in labor share of revenue.
• The decline in labor share is significant for firms in the top three size quantiles. There is therefore evidence that IT is one of the driving forces for the decline in labor share and the increased concentration over time.

Information Technology, Firm Size, and Industrial Concentration
Authors: Erik Brynjolfsson, Wang Jin, Xiupeng Wang
From: Stanford Digital Economy Laboratory, Boston University

Large firms and labor market power

In this commentary, di Mauro et al. look at the market power of large firms in labor markets. They used firm-level data from 19 European countries and found that

• Contrary to common wisdom, large firms charge lower markups than smaller firms.
• Larger firms exert monopsony power in labor markets and/or face less worker power.

The policy implications of the results are critical for competition authorities. When distortions originate in the product market, policies should steer on safeguarding new entries and price setting; when instead, distortions originate in the labour market, policies should aim at reducing the monopsony power of firms rebalancing the relative bargaining power of firms with respect to the workers.

Sources of large firms’ market power and why it matters
Authors: Filippo di Mauro, Matthias Mertens, Bernardo Mottironi
From: Halle Institute For Economic Research, LSE