July 24, 2023
Testing the “superstar hypothesis”
The historic rollout of television in the United States provides a natural experiment in scale-related technological change.
Source: National Archives and Records Administration
Technological advancement has brought enormous wealth and prosperity to humanity. But some technologies widen the gap between the haves and the have-nots, according to a paper in the American Economic Review: Insights.
Author Felix Koenig found that so-called “scale-related technical change” in US television markets in the middle of the 20th century significantly boosted entertainer wages at the top of the distribution at the expense of those at the bottom.
The findings are some of the first empirical confirmation of economists' standard tool for modeling “superstar” dynamics.
There are several different theories about inequality and rising inequality—probably the most prominent is skill-biased technical change. What's distinctive about the superstar model is that it tries to explain what's going on at the very top of the income distribution, as distinct from what's going on with the bottom 99 percent.
In most economic models, technology tends to be a rising tide that lifts all boats. But in 1981, economist Sherwin Rosen demonstrated clearly how technological change can lead to winner-take-all dynamics.
“There are several different theories about inequality and rising inequality—probably the most prominent is skill-biased technical change,” Koenig told the AEA in an interview. “What's distinctive about the superstar model is that it tries to explain what's going on at the very top of the income distribution, as distinct from what's going on with the bottom 99 percent.”
Rosen’s model was based on scale-related technical changes that relax diseconomies of scale—the forces that make it more expensive to make an extra unit of goods and services as a producer gets bigger—thereby making large-scale production feasible. With scale-related technical change, large-scale production becomes more feasible, and the best producers can then attract an even larger share of customers at the expense of the less talented.
To test the predictions from Rosen’s model, Koenig analyzed what happened to the wages of entertainers in the United States when local television stations became popular in the 40s and 50s.
Before television, an entertainer's audience was limited by the number of people that could fit in an auditorium or stadium. But local TV made it possible to reach significantly more people, creating local superstars.
However, television didn’t spread to everyone immediately like today’s new platforms.
The technology itself forced TV stations to film live and locally. Some shows went national, but in the early years most remained relatively local. Moreover, the rollout of broadcast antennas was also heavily planned by the government, which determined the areas and timing of when local shows were launched, with some launches delayed due to technical errors.
By comparing local labor markets that got a TV antenna to those that didn’t, before and after the rollout, Koenig could estimate its impact on the wage distribution of entertainers.
He found that the launch of a TV station shifted more income to the entertainers who were already earning the most, with smaller increases at slightly lower income levels. And the further down in the income scale, the faster the gains disappeared. The impact could even be seen in the overall US wage distribution: the share of entertainers in the top 1 percent doubled.
However, the number of entertainment jobs overall declined by roughly 13 percent, with middle-income jobs suffering the heaviest losses, just as predicted by Rosen’s theory.
These results were further supported by the fact that the impacts on the local entertainer income distribution disappeared as local TV filming was supplanted by the videotape recorder, which shifted filming to the national level.
Koenig says that his work helps show that superstar effects can be an important driver of wage inequality, but he also says that they will only occur in special circumstances.
“In a world where two mediocre people can achieve just as much as one very good person, you don't get these superstar effects,” Koenig said. “In that case, the very good person at most makes twice as much as the two mediocre people. But in entertainment, that's not the case; listening to two mediocre comedians is just not nearly as rewarding as listening to one good show.”
“Technical Change and Superstar Effects: Evidence from the Rollout of Television” appears in the June 2023 issue of the American Economic Review: Insights.