The consolidation of corporate buyers is driving income inequality

Rising income inequality is an increasingly serious problem in many countries — and MIT Sloan Professor Nathan Wilmers wants to understand its causes. In his research, Wilmers, who is an assistant professor of work and organization studies at MIT Sloan, has identified a factor that contributes to income inequality in a significant way — the power of big corporate buyers. Wilmers, a member of the faculty steering committee for the Good Companies, Good Jobs Initiative at MIT Sloan, recently discussed his findings and their implications.

You did an interesting research project about how corporate buyers influence wage inequality in the U.S. Tell us a little bit about that study.

I was thinking about how pay has basically stagnated for U.S. workers without a college degree since the 1970s. A lot of the jobs that used to be relatively well-paying positions for workers without a college degree are concentrated in manufacturing and logistics-related industries. And I read some anecdotal evidence that there had been some consolidation among the large buyers that these manufacturing and logistics companies sell to.

I was interested in testing whether that consolidation affected working conditions at suppliers and could be part of the reason why middle-skill workers had seen very little wage growth since the 1970s. The difficulty with testing this is it's hard to figure out what these networks are between buyers and suppliers; that is typically proprietary information. But for a subset of supplier companies that are publicly traded, there was an accounting regulation that went into force in the late 1970s that required companies to disclose to investors any big buyers that accounted for 10% or more of their revenue.

Using that data, I found that, over time, as a company becomes more reliant on sales to big buyers, its wages and labor costs tend to decline. I also looked at what happens when big buyers merged together. I found that when big buyers consolidate, wages at their manufacturing and logistics suppliers go down. And this phenomenon — the increasing power of large buyers — explains around 10% of wage stagnation since the late seventies.

Ten percent is a fairly significant chunk. Is that wage stagnation in the U.S. economy in general, or wage stagnation for lower-wage workers?

It's overall wage stagnation in all nonfinancial firms. If you narrowed in to manufacturing and logistics industries that are most affected by this, it would probably be a bit higher. And I found in another part of the analysis that the negative wage effects at suppliers are concentrated on wages for workers without a college degree.

I certainly remember hearing anecdotally about big, price-oriented companies like Walmart trying to drive down prices at suppliers.

That’s right. Part of the story is the rise of big retailers like Walmart or, more recently Amazon, that sit atop huge supply chains connecting suppliers to consumers  — and are able to put a lot of pressure on suppliers for lower prices. The other set of buyers that increased a lot in prominence in my data during this period are tech and information companies. There the story is different. It's more about outsourcing. A lot of large tech companies employ a core of highly skilled workers, like managers and computer programmers, and then outsource things like janitorial and food service work to other organizations. That’s a buyer-supplier relationship, but it involves outsourcing labor.

As we're talking, I think about the Coalition of Immokalee Workers, a group that’s had some success in improving working conditions for workers on Florida tomato farms. They negotiate with buyers like Whole Foods or Taco Bell for better tomato prices that enable better wages for farm workers — rather than just focusing on negotiating with farmers. It sounds like your research suggests that's probably a smart strategy.

Yes, I think the Coalition of Immokalee Workers is a great example. In one industry on a small scale, they essentially realized, "Wait, it's not that these farmers we're working directly for have big profit margins and can pay us more. We need to go to the big buyers themselves to get some bargaining leverage.”

Another example globally is the anti-sweatshop movement, which doesn't focus on bad employers at the level of, say, a particular factory owner in Honduras. It focuses on big brands that contract with these firms. There's been an attempt to build up supply chain codes of conduct, but it has largely been focused internationally. I think these findings suggest there could also be a role in domestic sourcing for some sort of good jobs supply chain code of conduct for responsible buyers.            

Another implication of these findings relates to antitrust enforcement and competition policy, which in general is directed toward seller concentration rather than buyer concentration and is focused on consumers rather than workers. Regulators should consider outcomes for workers when assessing, say, a merger between two big retailers or two big buyers.

This interview was adapted from the Good Jobs, Good Companies Initiative at MIT Sloan’s “Work in Progress” series.