Micro-mechanisms behind declining labour shares: Market power, production processes, and global competition

Matthias Mertens

No 3/2019, IWH-CompNet Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: This article investigates how changing production processes and increasing market power at the firm level relate to a fall in Germany's manufacturing sector labour share. Coinciding with the fall of the labour share, I document a rise in firms' product and labour market power. Notably, labour market power is a more relevant source of firms' market power than product market power. Increasing product and labour market power, however, only account for 30% of the fall in the labour share. The remaining 70% are explained by a transition of firms towards less labour-intensive production activities. I study the role of final product trade in causing those secular movements. I find that rising foreign export demand contributes to a decline in the labour share by increasing labour market power within firms and by inducing a reallocation of economic activity from nonexporting-high-labour-share to exporting-low-labour-share firms.

Keywords: labour share; market power; labour market distortions; international trade; factor substitution (search for similar items in EconPapers)
JEL-codes: D24 E25 F16 J50 L10 L60 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-bec, nep-com, nep-eur, nep-int, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhcom:32019

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