We have seen a long period of stagnation in productivity and wages within most firms while a minority of high-performers – or ‘superstar firms’ – have been the main drivers of productivity and wage growth.

• The productivity (value added per worker) and average wages of the median firm today are the same as in the mid 1990s, after accounting for inflation.
• Meanwhile productivity and average wages among the 10% of workers employed by the highest-performing firms are substantially higher than they were in the mid 1990s.

While inequality between firms is not necessarily a problem, it is concerning if large numbers of workers are in poorly performing, less productive firms and not sharing in improvements in living standards. It is also a concern when the growing dispersion in the performance of companies goes hand in hand with a stalling of overall economic performance, a trend already seen in the US.

These are among the findings of new research published today as part of the IFS Deaton Review of Inequalities, funded by the Nuffield Foundation. The report argues that one part of tackling growing inequality between people needs to include tackling the market power enjoyed by some firms and ensuring we have even more robust competition regimes. This needs to go alongside better policies to encourage innovation, skills and investment to raise overall productivity.

Other key findings include:

• There has been a growing dispersion between firms in the level of profits and ‘markups’ – the price charged for products over and above the cost of production. Economy-wide markups appear to have increased, because of the increased importance of superstar firms.
• Industries have tended to become more concentrated, with a larger share of output being produced by the largest firms.
• Since the early 1980s, there has been some reduction in the share of national income going to wages in the UK (although this trend was weaker than that seen in the US). In other words, more of GDP has gone to the owners of capital relative to the amount paid to workers. Since capital income is more unequally distributed than earnings, this will also have played a role in increasing income inequality.
• If the firm performance of the ‘rest had kept up with the best’, this would help raise overall productivity, pay and living standards. GDP per hour worked grew by about 2.3% per year between 1981 and 2007, compared with only 0.2% between 2007 and 2019.
•  Even where ‘superstar firms’ have acquired their position through highly beneficial innovations and superior technology, the market power that this confers still risks harming consumers and workers subsequently.

Professor John Van Reenen (LSE), one of the report authors, said:

‘The most important economic problem for the UK since 2008 has been dismal productivity growth, which in turn has led to pitiful pay increases. Only in a relatively small number of firms, employing a minority of the UK’s workforce, have productivity and wages improved in the past quarter-century.

‘To tackle this, we need a laser-like focus on increasing firm productivity through better policies on innovation, skills and investment as well as robust competition regimes to ensure that there is a level playing field.’

Robert Joyce, a Deputy Director at IFS and on the panel of the IFS Deaton Review of Inequalities, said:

‘When we think about inequality we naturally tend to focus on people’s incomes and earnings. But they result from the way that companies operate and how productive they are. A combination of poor productivity growth for most and the rise of some “superstar” firms has been one of the drivers of both stagnant living standards and inequality in the UK. Any concerted policy aimed at influencing inequalities will therefore need to consider policy on things such as competition, regulation and innovation.’

Notes to editors

1. ‘Firms and inequality’ is an IFS Deaton Review of Inequalities chapter by Jan De Loecker (KU Leuven; CEPR; NBER), Tim Obermeier (IFS) and John Van Reenen (LSE; MIT).This is embargoed until 0001 Thursday 3rd March. Join our event at 0930 on Thursday 3rd March where the authors will present the findings from the report and take part in a Q&A.

   For more information and to speak to the authors, please contact the IFS press office: Kirsty Ridyard at [email protected] | 07730 667 013

2. John Van Reenen is Ronald Coase School Professor at the London School of Economics and Director of the Programme on Innovation and Diffusion (POID) at the Centre for Economic Performance. Jan De Loecker is Professor of Economics at the KU Leuven, a Fellow of the Econometric Society, a Research Associate at the NBER and a Research Fellow at the CEPR.
3. This work has been produced as part of the flagship IFS Deaton Review of Inequalities in the 21st Century. Launched in 2019, this is an ambitious five-year project, initiated by IFS and funded by the Nuffield Foundation. With the Nobel Laureate Professor Sir Angus Deaton in the chair, the panel overseeing the project includes world-leading experts in sociology, demography, epidemiology, political science, philosophy and economics. www.ifs.org.uk/inequality
4. The Institute for Fiscal Studies (IFS) is Britain’s leading independent microeconomic research institute. IFS publications are free to view on the IFS website (www.ifs.org.uk), where you can also find more information about our research, governance and funding. Please follow @TheIFS on Twitter for regular updates or contact the Press Office on 07730 667 013.
5. The Nuffield Foundation is an independent charitable trust with a mission to advance social well-being. It funds research that informs social policy, primarily in Education, Welfare, and Justice. It also funds student programmes that provide opportunities for young people to develop skills in quantitative and scientific methods. The Nuffield Foundation is the founder and co-funder of the Nuffield Council on Bioethics and the Ada Lovelace Institute. The Foundation has funded this project, but the views expressed are those of the authors and not necessarily of the Foundation. Visit www.nuffieldfoundation.org