Agents of Inequality: Common Ownership And The Decline Of The American Worker

Abstract

The last forty years have seen two major economic trends: wages have stalled despite rising productivity, and institutional investors have replaced retail shareholders as the predominant owners of the U.S. equity markets. A few powerful institutional investors—dubbed common owners—now hold large stakes in most U.S. corporations. And in no coincidence, when U.S. workers acquired this new set of bosses, their wages stopped growing while shareholder returns increased. This Article explains how common owners shift wealth from labor to capital, thereby exacerbating income inequality.

Powerful institutional investors pushing public corporations en masse to adopt strong corporate governance has an inherent, painful tradeoff. While strong governance can improve corporate efficiency by reducing management agency costs, it can also reduce social welfare by limiting investment and thus hiring. Common owners act as a wage cartel, pushing labor prices below their competitive level. Importantly, common owners transfer wealth from workers to shareholders not by actively pursuing anticompetitive measures but rather by allocating more control to shareholders—control that can then be exercised by other shareholders, such as hostile raiders and activist hedge funds. If policymakers wish to restore the equilibrium that existed before common ownership dominated the market, they should break up institutional investors by limiting their size.

Keywords: Common ownership, institutional investors, corporate governance, labor monopsony, income inequality

JEL Classification: J3, J42, K21, K22, K31, L4,