One of the more interesting aspects of the digital transformation of society is the prevalence of the ‘Matthew Effect’, which suggests that the new tools enable those with the means and motivation, while not helping those without.  This helps to deepen the inequalities in our society.

In the labor market, this risk is evident, with the premium paid for the highest skills rising at the same time as a growing number of more mundane tasks are capable of being automated.  Globalization has also played a major role, as it is easier than ever before for the ‘superstars’ to trade their skills internationally, whereas those at the lower end of the skills spectrum face growing competition from cheaper places elsewhere.

This ‘superstar effect’ has been explored in a new paper from the London School of Economics, which aims to understand the role technology plays in the whole affair.

“An alternative explanation for rising inequality at the top end focuses on increasing “superstar effects,” which generate large wage differences among workers with nearly identical talent, particularly at the top of the distribution,” the researcher explain. “Crucial to the magnitude of such effects are technologies that expand the scale over which talent is deployed.”

Superstar premium

The study examines the entertainment industry, as it went through a number of profound technological shifts during the 20th century, not least of which was the mass introduction of televisions.  It meant that live performances went from being viewed by a few hundred to millions very quickly.  It also meant that people had ready access to the finest talent across the world rather than simply the finest talent in their region, so people would increasingly choose to watch television rather than go to the theater.

As might be expected, this period coincided with considerable income inequality growth, with the incomes of the stars at the top end rising significantly.  This coincided with a decline in mid-paid jobs, and that demand shifting instead to low-paid jobs, which saw an increase.  This contrasted markedly with the remainder of the American economy, which saw income growth across the board.

“Star entertainers increased their audiences fourfold through TV, and the sector experienced sharp income concentration at the top,” the researcher explains. “The increase in production scalability has profound effects on inequality at both the top and bottom of the distribution, in line with the prediction of superstar effects.”

An ideal environment

The researcher believes that television provides a natural environment for testing the superstar effect, because it wasn’t a technology that was rolled out wholesale across the country.  Filming in the early days was predominantly a local affair, which they believe is akin to the launch of a giant theater in the area, with the whole area potential viewers.

Couple this with the staggered rollout caused by signals from neighboring stations interfering, which resulted in various markets missing out on the initial launch of television, and there is sufficient variation to allow for us to see just how important the technology was in the labor market.

The results show that the presence of a TV station boosted the pay for the highest paid by 17%, with this propelling a number of entertainers into the higher echelons of the national pay range.  The data also shows that these gains are largely concentrated in a small number of the best performers, as the share of overall income going to the top 1% doubled.

“Moreover, the ability to reach larger markets puts many lesser stars out of work,” the paper continues. “The number of mid-paid entertainer jobs declined significantly and total employment fell about 13%.”

Competition for talent

The data suggests that a major contributing factor was the availability of talent.  In markets with limited competition among employers, there was limited income growth, even at the top end.  The researcher suggests this is evidence that concentration of wealth is less a consequence of dysfunctional markets, as it is of markets that are highly competitive and working well.

This makes sense, as the advent of television saw the audience for the best performers going up by over 500%, with their income typically growing in unison with this growth in audience numbers.  The problem is that audience numbers for lesser performers, who still plied their trade in theaters and other live venues, shrunk significantly, with their incomes suffering similarly.

So do these findings provide clear lessons for other sectors of the economy?  Yes and no. The superstar effect seems most prominent in markets where competition for talent is strongest, with this then reflected in the revenue such superstars could generate.

“This highlights that market concentration on a few stars does not necessarily indicate malfunctioning of markets, instead the superstar effects suggests that rising market concentration is a sign of technical progress,” the researcher explains. “To evaluate inefficiencies associated with top income concentration, it will be important to distinguish cases where superstar effects bring better quality to a greater share of consumers from cases where market concentration results from the break-down of competition.”

The advent of television was largely a positive one for consumers, with many more people now able to access the finest entertainment, but it did appear to concentrate income into the hands of the superstars in the field.  This trade-off between consumer welfare and worker welfare is likely to be one that must be balanced in a wide range of fields where technology plays a part.

For instance, the last few years have seen MOOCs allow the superstar academics to deliver lectures to a global audience, and there are growing signs that these lectures could be used as part of the curricula at less prestigious schools around the world.  Will this see a similar concentration of wealth among the most talented academics?  Time will tell.