RAMP operates in the context of individual firms. A prominent economic explanation for the decline in the share of economic growth going to workers, however, suggests that it is not the individual firm that is broken. Rather, the decline in labor’s share of economic growth is due to heightening concentration of industries into a few “superstar” firms.

The argument here is that labor share (the proportion of total GDP going to employees) has declined not because the share of each individual firm’s output going to workers is declining. Rather, the labor share has declined because “superstar” firms with lower labor costs and higher efficiency have gobbled up increasing market shares within their industries. The growth of such firms has resulted in a major reallocation of labor within sectors into the lower labor-share, superstar firms, resulting in low wage growth. These companies are also large enough that they are able to shape and constrain wages, especially for less skilled occupations. 

There are several flaws with this theory as an explanation for anemic wage growth. First, wage stagnation experienced by most workers involves a good bit more than a decline in the labor share.  Significant changes have been taking place within the labor share itself.  An increasing portion of that share has been going to the top 10% (T10) of workers and a similarly declining portion has been going to the bottom 90% (B90) of workers—workers paid less than approximately $100,000 annually today. The sharp shift within the labor share has been an important factor in the development of wage stagnation. It accounts for somewhere around 50% of the declining Compensation Ratio, or CR (the share of wages and profits going to the B90).

At the same time, the superstar firm thesis does explain a meaningful part of the decline in the labor share itself—between 14 and 33%, according to David Autor .  Economic theory might suggest that if the implementation of RAMP induces these superstar firms to pay higher wages than they otherwise would have, it could impede both the efficiency and growth of the firms and thus slow economic growth overall. But the superstar firm theory has a significant flaw: it correctly identifies the trend of industry concentration but posits the wrong explanation for the trend’s continuation.

These firms have been able to continue concentrating market share not simply because they’re efficient well-oiled machines making above-par contributions to growth, but also because they’ve used their economic might to undersell and muscle out their competition, thus increasing their oligopoly power and ability to set low wages.  If this is correct, obviously firms that were once efficient, having then reached a monopsonist position, no longer are—they are now able to grow by paying less for labor than an efficient, competitive market would otherwise demand. Seen from this vantage point of monopsony, RAMP serves as a much-needed corrective to restrain the ability of large firms, as they grow, to force down the wages of their rank-and-file workers through their market power, making it easier to open up industries to smaller firms currently unable to compete with the monopsonists’ anti-competitive practices.

 RAMP would serve as a corrective for large firms’ excessive market power, first, by asking more initially from companies that have relatively low CRs within their industry. Such companies will not receive the 20% tax break that other companies would receive. In addition, RAMP would publicize all companies’ CRs, enabling investor social ratings to identify and affect investment going to companies that have especially low CRs within their sectors. It would also be possible to oblige companies with unusually low CRs to lift their CRs by a specified degree toward the median.

Second, RAMP has implications for the ability of companies, including those with monopsonist power, to gain market share by reducing their labor share, which companies in monopsonist positions do. Three of the most common ways companies lower their labor shares are: (1) By apportioning their revenue gains mostly to profits and/or the salaries/benefits of T10 employees; (2) Through greater outsourcing/subcontracting by those companies, contributing to the growth of the “fissured” economy; (3) Through productivity from either technological change, incentives, or organizational efficiency.

RAMP will restrain the first two of these means by requiring that companies restore a significant part (such as half) of any drop in the CR beyond the small range of change allowed to permit flexibility. That will make the first avenue (continuing to direct revenue gains mostly to the top) financially unattractive, full stop, because of the consequences that doing so would mean for federal taxes and contracts. As for outsourcing/subcontracting, the requirement to restore a significant part of the CR raises the price of cost-cutting through outsourcing or subcontracting at workers’ expense. It increases the price in a manner as to restrict their use either only to the more highly profitable options or to situations where the main reasons for companies engaging in the practices are non-financial.

With regard to improving productivity, companies will not lose the incentive to make capital enhancements to lower labor costs and/or improve their market share.  To the extent that these investments are paid for by reducing compensation costs, companies will not only still be able to make such investments but will also earn attractive payouts from them, even after sharing half the gains with their workers. According to our research, sharing half of gains will discourage some investments, but only investments that already lie at the margins of required financial investment return. On the other hand, when productivity improvements do occur, companies will direct a solid proportion of the gains under RAMP to the benefit of their rank-and-file workers, whereas today no such requirement of companies exists.

The very act of keeping their CRs stable means that monopsonist companies now in a position to squeeze workers will henceforth need to share revenue gains with their workers or bear larger costs from losing the incentives attendant to RAMP. Taken together, the combination of provisions in RAMP should impede or even reverse the damaging effects that growing concentration within industries have had on wage stagnation.

Companies in some industries also scapegoat loss of business to low-wage global competition in order to justify denying wage raises to their workers and gain greater profits.  That is undoubtedly one reason that profits have increased in those industries, wages for B90 workers have stagnated, and CRs have declined during the past 45 years. RAMP’s operation will also restrain the wage suppressing effect of this practice because such companies will need to restore a significant part of the resulting drop of the CR to the company’s workers.