Production Technology, Market Power, and the Decline of the Labor Share

Agustin Velasquez
Authors registered in the RePEc Author Service: Agustin Velazquez

No 2023/032, IMF Working Papers from International Monetary Fund

Abstract: The labor share has been declining in the United States, and especially so in manufacturing. This paper investigates the role of capital accumulation and market power in explaining this decline. I first estimate the production function of 21 manufacturing sectors along time series and including time-varying markups. The elasticities of substitution for most sectors are estimated below one, implying that capital deepening cannot explain the labor share decline. I then track the long-run evolution of the labor share using the estimated production technology parameters. I decompose aggregate labor share changes into sector re-weights, capital-labor substitution, and market power effects. I find that the increase in market power, as reported in recent studies, can account for, at least, 76 percent of the labor share decline in manufacturing. Absent the rise in market power, the labor share would have remained constant in the second half of the 20th century.

Keywords: Labor share; elasticity of substitution; capital accumulation; market power; labor share decline; market power effects; capital-labor substitution; market power narrative; markup series; capital share; Manufacturing; Income (search for similar items in EconPapers)
Pages: 41
Date: 2023-02-10
New Economics Papers: this item is included in nep-com, nep-des, nep-eff, nep-lma and nep-mac
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Citations: View citations in EconPapers (3)

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