Common Ownership and the Decline of the American Worker

The last forty years have seen two major economic trends: Wages have stalled despite rising productivity, and institutional investors have replaced retail shareholders as the predominant owners of the American equity markets. A few powerful institutional investors—dubbed common owners—now hold large stakes in most U.S. corporations. It is not a coincidence that at the same time American workers got a new set of bosses, their wages stopped growing, and shareholder returns went up. This Article reveals how common owners shift wealth from labor to capital, exacerbating income inequality. Powerful institutional investors’ policy of pushing public corporations to adopt strong corporate governance has an inherent, painful tradeoff. While strong governance can improve corporate efficiency—by reducing management agency costs—it can also reduce social welfare—by limiting investment and depressing the labor market. The shift to strong governance causes managers to limit investment and thus hiring, thereby depressing labor prices. Common owners act as a wage cartel, pushing labor prices below their competitive level. Importantly, common owners transfer wealth from workers to shareholders not by actively pursuing anticompetitive measures but rather by allocating more control to shareholders—control that can then be exercised by other shareholders, such as hostile raiders and activist hedge funds. If policymakers wish to restore the equilibrium that existed before common ownership dominated the market, they should break up institutional investors by limiting their size