The Profit Paradox

I finished another book and added it to my book library. The Profit Paradox was written by economist Jan Eeckhout and focuses on the decline of competition in the market. This decline, and the resulting dominance of large firms, has contributed to inequality, reduced innovation, and dropped the labor share of the economy.

The amount the economy spends on labor has decreased steadily since 1980. The labor share, the total expenditure on wages as a share of production in the economy, has historically been around two-thirds, or 65 percent. The remaining one-third is expenditure on capital and profits. Today the labor share is below 58 percent. A decline of seven percentage points.

Jan Eeckhout – The Profit Paradox

There are fewer start-up firms than there were four decades ago, while the percentage of profits a firm makes as a share of its sales have seen a sharp increase from one to two percent of sales in 1980 to seven to eight percent in 2016. The central tenet of the profit paradox is that rapid technological change creates enormous potential for economic and social progress. Innovating firms improve efficiency and the lives of citizens. At the same time, the new technology lets firms build up market power and dominance that is detrimental for work.

This is a story of market power, which if left unaddressed, has an outsized impact on the future of work. The author closes the book with recommendations intended to return and protect the competitive nature of markets. Explore the topic via this informative book.

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