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Capital-Labor Substitution and the Decline in Labor's Share

Dan Berkowitz

No 6380, Working Paper from Department of Economics, University of Pittsburgh

Abstract: The studies of Piketty (2014) and Karabarbounis and Neiman (2014) show that labor sharesaround the world decline because capital robustly substitutes for labor as its relative costdeclines. Because these studies use aggregate data, they cannot show how heterogeneous firms'decisions shape aggregate labor shares. Using Chinese manufacturing data, we show firms' la-bor shares di¤er substantially because of the massive heterogeneity of their capital intensities,product markups, and ownerships. Although capital and labor are substitutes and the cost ofcapital declines, our counter-factual analysis indicates the quantitative impact of capital-laborsubstitution on declining labor shares is small.

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Date: 2018-01
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