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Rise in 'superstar firms' pushing up wage growth inequality

Productivity and average wages of the median company today are the same as in the mid 1990s, after accounting for inflation, IFS said. Photo: Getty

A minority of "superstar firms" have been driving up productivity and wages as the majority of companies stagnate, pushing up pay growth inequalities across the nation, a new report says.

According to a study from the Institute of Fiscal Studies (IFS), there has been "a long period of stagnation" in productivity and wages within most firms, rising fears rise over the growing dispersion in the performance of businesses amid economic woes.

"A combination of poor productivity growth for most and the rise of some superstar firms has been one of the drivers of both stagnant living standards and inequality in the UK," said Robert Joyce, deputy director at IFS.

There has been a growing dispersion between firms in the level of profits and "markups" – the price charged for goods over and above the cost of production. IFS says as a result economy-wide markups appear to have increased, because of the increased importance of superstar firms.

IFS said that the productivity (value added per worker) and average wages of the median company today are the same as in the mid 1990s, after accounting for inflation.

Meanwhile productivity and average wages among the 10% of workers employed by the highest-performing firms are substantially higher than they were in the mid 1990s.

"The most important economic problem for the UK since 2008 has been dismal productivity growth, which in turn has led to pitiful pay increases," said one of the report authors, professor at LSE John Van Reenen. "Only in a relatively small number of firms, employing a minority of the UK’s workforce, have productivity and wages improved in the past quarter-century."

It highlights that since the early 1980s, there has been some reduction in the share of national income going to wages in the UK, although this trend was weaker than that seen in the US.

This means that more of GDP has gone to the owners of capital relative to the amount paid to workers. GDP per hour worked grew by around 2.3% per year between 1981 and 2007, compared with 0.2% between 2007 and 2019.

"Since capital income is more unequally distributed than earnings, this will also have played a role in increasing income inequality," the report says.

Read more: UK workers set for biggest pay rise in decades

Sectors have also become more concentrated, with a larger share of output being produced by the largest firms.

Its Deaton review of inequalities report argues that one part of tackling growing inequality between people needs to include tackling the market power enjoyed by some firms and ensuring we have even more robust competition regimes.

The institute says this needs to go alongside better policies to encourage innovation, skills and investment to raise overall productivity.

"We need a laser-like focus on increasing firm productivity through better policies on innovation, skills and investment as well as robust competition regimes to ensure that there is a level playing field," added Van Reenen.

However, IFS warns that even where superstar firms have acquired their position through highly beneficial innovations and superior technology, the market power that this confers still "risks harming consumers and workers" subsequently.

Read more: UK salaries soar at near record pace but jobs cool in January

The IFS research comes after a separate study showed UK employers are planning the biggest pay hikes of the last decade, but wages for workers will still be below the rate of inflation.

While the Bank of England (BoE) signalled worries over an overheating labour market and rampant wage gains, the Chartered Institute of Personnel and Development (CIPD) found employers expect to award pay rises of 3% in 2022.

It comes as UK salaries grew at a near record pace in January, but vacancies cooled to their slowest pace in nine months.

The Recruitment and Employment Confederation (REC) and KPMG said their index of demand for staff eased to 68.6 from 69.3 in December as demand for workers continued to grow as pandemic restrictions eased in Britain. Although this was the lowest reading since May it is still well above its long run average.

Watch: How to save money on a low income