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Micro-mechanisms behind declining labor shares: Rising market power and changing modes of production

Matthias Mertens

International Journal of Industrial Organization, 2022, vol. 81, issue C

Abstract: I derive a micro-founded framework showing how rising firm market power on product and labor markets and falling aggregate labor output elasticities provide three competing explanations for falling labor shares. I apply my framework to 20 years of German manufacturing sector micro data containing firm-specific price information to study these three distinct drivers of declining labor shares. I document a severe increase in firms’ labor market power, whereas firms’ product market power stayed comparably low. Changes in firm market power and a falling aggregate labor output elasticity each account for one half of the decline in labor's share.

Keywords: Labor share; Product market power; Labor market power; Production technology; Jel; D24; E25; J50; L10; L60 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.ijindorg.2021.102808

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International Journal of Industrial Organization is currently edited by P. Bajari, B. Caillaud and N. Gandal

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Handle: RePEc:eee:indorg:v:81:y:2022:i:c:s0167718721001004