Rockonomics

by Alan B Krueger

  Can musicians control the arc of their careers?

  It is not something you can control. You can do your best at trying to do everything the right way—but what you said about luck, a lot of it is momentum. You have to be ready to latch onto the momentum that you have and continue working so you can follow it up. I remember that when we were just breaking through, they would say, “You’re really not a cemented artist until your third album.” A lot of artists’ sophomore records would fail, and they never make it past that. If your third record is a hit, you pretty much have a career, and enough music to tour on for a long time—because, if you stay true to your fans and deliver, when you come out live or when they hear you in an interview, it is a relationship like a marriage; if each time you cement it more, your fans are loyal. We were lucky enough to have a worldwide response.

  You have had a storybook career and a wonderful life. How have you managed to avoid the problems, such as drugs and alcohol, that have afflicted so many other superstars?

  First of all, it is not in my nature. I do not like to be out of control. And Emilio and his father went to Spain before coming here, and they were eating out of soup kitchens in Spain. His personality is very driven, and he wanted to succeed. Work is his drug and alcohol. He is a workaholic.

  Together, we made a family first. By the time I had huge success I already had my son. I went through a lot with my father. He was a political prisoner after the Bay of Pigs in Cuba for two years, then he joined the U.S. Army and when he came back from Vietnam he had Agent Orange poisoning, and I had to take care of him. Having to deal with these things early on in my life, and the struggles that Emilio went through, when we had the opportunity to do something that we loved, and be together doing it—and be able to bring our family with us—we were not going to waste that opportunity.

  If you’re a young kid and you don’t know anything and you haven’t gone through any struggles, and all of a sudden you have all this money flowing in, you don’t have a basis for knowing where you’re coming from as to what is of true value….We went through a lot of struggles early on in life that show you the value of things.

  That’s why we wanted to help out other artists and give a hand up. Emilio has produced and was instrumental in the careers of Shakira and J. Lo. He did J. Lo’s first record, with the song “Let’s Get Loud,” which I wrote. Jennifer fell in love with the song. It was supposed to be for my record. I preferred her to do it, rather than me, because she was a freshman artist….Emilio was happy every time he was able to help in the success of another artist, such as Ricky Martin and Mark Anthony.

  Superstar Careers

  Figure 4.3a: Concert Revenue over the Life Cycle for Top Male Artists

  Source: Author’s calculations based on Pollstar Boxoffice Database, and adjusted for underreporting of concerts using data from Setlist.fm; see Appendix. Figures in constant 2017 dollars.

  The cumulative advantage that accrues to superstars can compound over the career. Figures 4.3a and 4.3b display the cumulative amount of concert revenue generated by top male and female headliners over the span of their careers. A few observations in connection with the figures are worth noting. First, superstars seem to be launching into orbit at younger ages. This is clearly the case of female artists—such as Taylor Swift, Lady Gaga, Rihanna, and Beyoncé, who are on a trajectory to eclipse Madonna and Céline Dion before long—but it is also the case for Justin Bieber. It took Billy Joel until his fifties to earn as much touring revenue (in inflation-adjusted dollars) as Justin Bieber earned by age twenty-three.27 Second, the female superstars tend to be solo artists, while many of the male superstars are lead singers of their long-established bands. Third, top male bands tend to earn more concert revenue over their careers than top female artists. U2 and Bruce Springsteen, for example, have grossed $1 billion more in revenue than Madonna and Céline Dion over their careers. This is primarily because male musicians spend more time touring. Ticket revenue per show for the top male and female performers are roughly equal.

  The younger superstars are benefiting from the general rise in concert ticket prices and revenue, and this rising tide is lifting their lifetime earnings. Thus the life cycle data do not provide any evidence of a pending decline in the winner-take-all nature of the music industry for the rising generation of pop stars.

  Figure 4.3b: Concert Revenue over the Life Cycle for Top Female Artists

  Source: Author’s calculations based on Pollstar Boxoffice Database, and adjusted for underreporting using data from Setlist.fm; see Appendix. Figures in constant 2017 dollars.

  Superstars in the Rest of the Economy

  How does the music industry compare to the rest of the economy? Since 1980, the entire U.S. economy has moved in the direction of a superstar market. Figure 4.4 shows that after falling for decades, the share of national income accruing to the top 1 percent of families more than doubled, from 10 percent in 1980 to 22 percent in 2017. The distribution of income in the United States overall is not as skewed as it is in the music industry, where the top 1 percent of performers take in about 60 percent of all income, but the United States as a whole is now back to the same level of inequality that existed during the Roaring Twenties.

  Figure 4.4: Percentage of National Income Accruing to Top 1 Percent and Top 5 Percent, 1917–2015

  Inequality has also risen among the bottom 99 percent of Americans. In the 1980s the bottom 10 percent of earners saw their inflation-adjusted wages decline, and they have barely recovered since then.28 And beginning in the mid-1990s the middle class started to hollow out.

  Reasons commonly cited for the rise in inequality in the United States are varied. They include the effects of globalization and technological change that have shifted demand away from less skilled workers; an erosion in union membership and decline in the real value of the minimum wage; changes in employer practices, such as non-compete clauses that restrict workers from accepting a job at a competitor, which have weakened worker bargaining power; and a breakdown in norms of fairness and corporate policies that historically compressed pay and constrained the earnings of top executives.

  Journalists often ask me to summarize the relative importance of each of these factors. In truth, it is a fool’s errand to try to quantify the percentage contribution of each factor, since the various factors overlap and interact, and their quantitative impact varies across the wage structure. A shift in demand against low-wage workers due to automation, for example, will weaken labor unions and hasten the erosion of norms of fairness, especially for blue-collar workers. Nevertheless, when pressed I usually respond that the traditional economic drivers of technological change and globalization probably account for around 35 to 40 percent of the shift in income distribution that we have observed, and non-traditional factors, such as shifting bargaining power and erosion in norms of fairness, account for the remainder.

  At the very top of the income scale, technological changes that increased scalability have clearly intensified superstar effects. The University of Chicago economists Steven Kaplan and Joshua Rauh, for example, write, “We believe that the U.S. evidence on income and wealth shares for the top 1 percent is most consistent with a ‘superstar’-style explanation rooted in the importance of scale and skill-biased technological change.”29 They highlight that the wealthiest Americans increasingly come from the technology, finance, and mass retail sectors, which, they argue, are the most scalable industries.

  One related part of the inequality story that has received a lot of attention lately involves the rise of “superstar” firms.30 That is, research has found that concentration in output within industries has increased, with a small number of superstar companies increasingly dominating the market. For example, over the last decade the four largest U.S. airlines increased their share of industry revenue from 41 percent to 65 percent.31 Larger hospita
ls have gobbled up smaller ones, and Amazon and Walmart have put tremendous pressure on mom-and-pop stores. Even in the beer business, despite the proliferation of craft breweries, the four largest breweries produce 90 percent of the beer consumed.

  This phenomenon is clear in the music industry as well. The three major record producers—Universal Music Group, Sony Music Entertainment, and Warner Music Group—hold a two-thirds share of the U.S. record market.32 The promoters Live Nation and the Anschutz Entertainment Group (AEG) have come to dominate the concert business.

  Superstar firms tend to have high profits and high productivity. Workers at superstar firms are paid relatively well, although the top firms tend to use relatively less labor than their competitors for the output they produce. As a result, the rise in superstar firms has contributed to the decline in labor’s share of national income.

  Superstar firms, including Google, Apple, and Amazon, have probably benefited from successfully deploying the technological innovations that enable them to take advantage of enormous scale economies. But there is also a concern that such firms use their dominant position to stifle competition.

  The rise of superstar firms has also contributed to the increase in inequality among the bottom 99 percent of workers. The superstar firms tend to employ higher-paid and more highly educated workers, and they often outsource jobs for lower-paid workers, such as those in janitorial, cafeteria, and security positions.

  Another feature of superstar firms is that they can exploit complementarities to grow and generate even more revenue and profit, meaning that they can leverage their scale in one market to have an advantage in another market. Apple, for example, uses Apple Music to help sell iPhones. Facebook purchased the photo-sharing app Instagram to leverage the service in its core social network platform and reach a younger demographic. In a sense, superstar companies can act like superstar musicians who use their YouTube popularity to sell concert tickets and endorse products. These complementarities don’t always work out—witness the unsuccessful merger between Citigroup and Travelers, which was eventually unwound. But superstar firms have an opportunity to take advantage of strategic complementarities that do not exist for smaller firms.

  Often these complementarities arise because growth begets improvement in service, which begets more growth. Consider the “Amazon flywheel”—the notion that by lowering costs and providing better prices, Amazon would attract more customers, and by attracting more customers it would attract more sellers, which in turn would help to lower prices further and provide more diversity of products, which would attract more customers, which would keep the flywheel spinning. Similarly, if Spotify attracts more users, it gathers more data on users’ preferences and can provide better song recommendations, which helps it to retain and attract more users.

  It is easy to see the hand of supply and demand in the rise of inequality, but reverberations of what I call “all that jazz” of political, corporate, and social choices are also evident. For example, the federal minimum wage has remained at $7.25 an hour since 2009, the second-longest stretch in American history in which it has remained constant, and therefore has been eroded by inflation. In real terms, the minimum wage today is below its value in the late 1960s. Cities and states that have raised their local minimum wages have boosted earnings for low-paid workers and reduced inequality.

  Collusion among firms to restrain wage growth and refrain from poaching one another’s workers, which is easier when there are a few dominant employers in a market, has also constrained wage growth for many workers. Apple’s Steve Jobs, for example, once threatened Google co-founder Sergey Brin, saying, “If you hire a single one of these people [software engineers] that means war.”33And it appears that for years, the railway equipment giants Knorr-Bremse AG and Westinghouse Air Brake Technologies Corporation have had an agreement—which they don’t consider to have been illegal—to refrain from soliciting, recruiting, and hiring each other’s workers without prior approval from their competitor—something which they have now agreed to stop but only after being sued by the Justice Department.34

  Adam Smith, the father of economics, predicted this behavior long ago when he warned us that employers “are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.”35 The Justice Department and Federal Trade Commission made clear in guidance issued in October 2016 that “agreements among employers not to recruit certain employees or not to compete on terms of compensation are illegal.”36 A government hotline was created for employees to report instances of wage fixing and no-poaching agreements. Shortly after taking office, Maka Delrahim, assistant U.S. attorney general responsible for antitrust enforcement, said in January 2018, “I’ve been shocked about how many of these [no-poaching agreements] there are, but they’re real.”37

  The ways we choose to write and enforce the laws affect inequality. The impact of supply, demand, and all that jazz on inequality is clear from comparisons across countries. While the United States and the United Kingdom have had almost equally sharp rises in inequality, other countries, such as Sweden, Germany, and France, have had much more moderate increases. Local laws, culture, customs, institutions, and business practices matter.

  Recall, too, that luck plays an outsized role in success or failure in superstar markets. There are many examples of unlucky companies with superior technology that failed because they were launched at the wrong time or in the wrong place. The rise of superstar employers adds an additional dimension to luck: workers might be lucky or unlucky when it comes to landing a job, and their company may turn out to be a superstar or may fall behind. The implications of good or bad luck in climbing the career ladder are magnified in a superstar job market, as small differences in one’s step on the job hierarchy translate to large differences in earnings.

  The role of luck is perhaps nowhere more evident than in the music industry, the subject of the next chapter.

  * I am grateful to Pollstar for providing me unprecedented access to its data.

  CHAPTER 5

  The Power of Luck

  I been in the wrong place, but it must have been the right time

  I been in the right place, but it must have been the wrong song.

  —Dr. John

  Reginald Dwight was growing frustrated playing piano in Bluesology, a “mediocre” band, as he describes it, performing for “people eating fish and chips in a cabaret thing.” So when the shy twenty-year-old spotted an ad saying “Singers and songwriters wanted,” he showed up at Liberty Records in London to audition. Upon arriving, he found an office overflowing with reel-to-reel tapes and piles of envelopes. Many other would-be singers and songwriters had seen the ad, too. Here’s how he tells the rest of the story:

  The guy behind the desk said, “What do you do?” I said, “I can sing and I can write songs, but I can’t write lyrics. I’m hopeless.” So he said, “Well, why don’t you just take this envelope.’ And he went through a pile of envelopes—it could have been any envelope! Talk about kismet. He gave me an envelope which was sealed. I took it back on the tube train (or the subway), and I opened it and I read it—and it was Bernie. It could have been any envelope; that was just the envelope he gave me.1

  Fifty years later, the singer now known to the world as Elton John still seems mystified recalling his chance meeting with the seventeen-year-old Bernie Taupin. The duo have since collaborated on more than thirty albums and sold more than three hundred million records, forming one of the most enduring and successful singer-songwriter collaborations in history.

  It is hard to imagine that Reginald Dwight would have won five Grammys and been inducted into the Songwriters Hall of Fame and the Rock and Roll Hall of Fame had the guy behind the desk plucked a different envelope from the pile. More likely he would still be playing before the fish-and-chips crowd rather than following the yellow brick road to gold.

/>   Elton John attributes his meeting Bernie Taupin to “kismet.” He may be right, but to the less mystically inclined it seems less like destiny than a totally random occurrence that brought them together. Both men were surely lucky that their chance connection led them to make beautiful music together and share it with the world—and so are we.

  There are many other well-known examples of chance events that changed music history: Mick Jagger and Keith Richards meeting on a train, Clarence Clemons strolling into an Asbury Park bar on a stormy night, Paul Simon and Art Garfunkel growing up a few blocks away from each other.2 There are also many cases of bad luck, such as tragic plane crashes that took the lives of Buddy Holly, Ritchie Valens, the Big Bopper, Patsy Cline, Otis Redding, and Jim Croce in their prime. And we never hear of the chance meetings that didn’t occur. Most important of all, there are numerous musicians who are just as talented and hardworking as the superstars, but for whom good luck never shined. They may have come out with the wrong song at the wrong time or in the wrong place. For any number of reasons, their careers never took off.

  In this chapter I consider the effect of luck—the random factors beyond our control that influence success and failure, both in the music business and in life in general. The effect of good or bad luck is magnified in a superstar market, which makes its influence readily apparent in the music business. But given the increasingly important role luck plays in the economy writ large, it is important to understand the impact of chance occurrences on our lives, and how best to tilt the odds in our favor.

  Oooh, What a Lucky Man He Was

  In a superstar market—where the top performers reap the benefit of enormous scale, while many others struggle to get by—the stakes of moving up or down the hierarchy are greatly amplified. As a result, anything that gives one performer an advantage over another provides an important edge. If good luck pushes someone up the ladder, then the consequences of luck are greater as well.