Jackson Hole Note: On Investment & Labor Share, Tech Bucks Trends In Other Sectors
Today, central bankers convening in Jackson Hole for the Federal Reserve Bank of Kansas City’s annual symposium will discuss the impact of rising concentration on the economy, specifically macroeconomic impacts and business investment. Two key points (and a few good reads) to keep in mind as you follow the conversation —
1. Tech companies lead the economy in R&D spending and new tech entrants continue to attract record VC investment
2. While labor share, wages, and investment are flat or down across the economy, and gross margins are up, these trends are actually reversed in tech. Digital is a bright spot where productivity gains are shared with workers and customers.
Further, as we’ve noted before, rising concentration is also likely a byproduct of competition between successful firms. Moreover, research on economy-wide rising margins is not compelling and, to the extent it’s valid, points to smaller, not larger, companies.
More below —
Leading tech services invest increasing amounts in R&D. “But the cost to generate that growth is going upward as well—at a faster clip. Combined spending on research and development is expected to rise 24% in 2018, while capital expenditures for the five are expected to surge by 48% compared with last year. For Big Tech, these expenses reflect the rising costs of running their current businesses while also developing new ones to stay more competitive—in a world where their most significant source of competition is mostly each other.” (Dan Gallagher, “Big Tech’s Growth Comes With A Big Bill,” The Wall Street Journal, 7/17/18)
Deal value in the tech sector is at historically high levels. “The global venture-investing market has seen broadly uninterrupted growth in total deal value since the dot-com crisis. The market is at record levels, with about $150 billion of venture investment in 2017, compared to about $55 billion prior to the dot-com crisis. Growth has come from both technology and other sectors, with technology experiencing marginally higher growth in recent years.” (“Assessing The Impact Of Big Tech On Venture Investment,” Oliver Wyman, 7/11/18)
Progressive Policy Institute’s Michael Mandel finds the labor share in the digital economy has risen, while gross margins have fallen since 2007, bucking trends in other sectors of the economy. “Based on new ‘digital economy’ data from a recent BEA working paper, we calculate that the labor share of the digital sector has risen since 2007, while gross margin of the digital sector has fallen over the same period. This result is consistent with strong competition in the digital product and labor markets.” (Michael Mandel, “The Digital Sector: Rising Labor Share, Falling Gross Margin,” Progressive Policy Institute, 8/13/18)