Bloomberg, July 5, 2022, Matt Levine commentary: "...universal owners vs. labor | Should index funds be illegal?" [Analytics correlating increased index investing with decreased incomes of pension beneficiaries]

Source: Bloomberg, July 5, 2022, commentary

Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit.

Opinion

Matt Levine

...universal owners vs. labor

By Matt Levine

July 5, 2022, 1:47 PM EST

Should index funds be illegal?

You know the theory. Public companies, these days, are increasingly all owned by large diversified institutional investors. These investors — “universal owners,” “common owners,” “ quasi-indexers” — own shares of all the public companies, so they are more interested in things that benefit all companies than they are in things that benefit one company at the expense of another. And because the companies are all well-governed and responsive to shareholders, they give these universal shareholders what they want: They do stuff that grows the pie for all companies rather than stuff that benefits one company at the expense of its competitors.

This theory is most often expressed as an antitrust worry about product-market competition: Airline A won’t cut prices to steal market share from Airline B, because that will lower Airline B’s profits more than it raises Airline A’s, and they have the same owners. But the implications of the theory are much broader than that. Some of them are good. Universal owners will internalize externalities, so they might be more concerned about, e.g., environmental issues than single-company owners would be.

But you could pretty easily extend the theory to find other worries. I proposed one back in 2020:

Here’s one: “Common ownership depresses employee wages: If one company cuts wages it will lose skilled workers to competitors, but if they all agree to cut wages the workers will have no ability to push back, and index funds blah blah blah.” That’s sort of an obvious extension of the antitrust theory. I have not Googled it carefully but I assume that there is already a literature; if there isn’t, though, go write it! That’ll get you tenure! Real wage stagnation over the past few decades has coincided with the rise of index funds and common ownership, so, you know, it feels empirically true. (You’ll probably want to be more careful empirically, for tenure.)

Well, here is “Shareholder Power and the Decline of Labor,” by Antonio Falato, Hyunseob Kim and Till von Wachter (at NBER, and a free version at SSRN):

Shareholder power in the US grew over recent decades due to a steep rise in concentrated institutional ownership. Using establishment-level data from the US Census Bureau’s Longitudinal Business Database for 1982-2015, this paper examines the impact of increases in concentrated institutional ownership on employment, wages, shareholder returns, and labor productivity. Consistent with theory of the firm based on conflicts of interests between shareholders and stakeholders, we find that establishments of firms that experience an increase in ownership by larger and more concentrated institutional shareholders have lower employment and wages. This result holds in both panel regressions with establishment fixed effects and a difference-in-differences design that exploits large increases in concentrated institutional ownership, and is robust to controls for industry and local shocks. The result is more pronounced in industries where labor is relatively less unionized, in more monopsonistic local labor markets, and for dedicated and activist institutional shareholders. The labor losses are accompanied by higher shareholder returns but no improvements in labor productivity, suggesting that shareholder power mainly reallocates rents away from workers. Our results imply that the rise in concentrated institutional ownership could explain about a quarter of the secular decline in the aggregate labor share.

If you are a company, you might want to hire the best employee away from your competitor, and you might offer her more money to do that. But if you are a universal owner of all companies, that does you no good; what you want is just for wages to be lower everywhere.

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Matt Levine at mlevine51@bloomberg.net

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