Labor share and market power in European firms

Jose I. Silva, Tomohito Okabe and Sergi Urzay

MPRA Paper from University Library of Munich, Germany

Abstract: This study examines the relationship between firms’ market power, captured by product markups and labor markdowns, and the labor share within European firms. Using firm-level data from the CompNet database, we develop a microeconomic framework linking the labor share to firms’ market power. Empirical results show that labor markdowns reduce the labor share, while product markups have a hump-shaped effect on it. Specifically, moderate increases in product markups initially lead to a rise in the labor share. However, as markups reach higher levels, firms with significant pricing power increasingly exercise monopsony power over their workers, amplifying markdowns and suppressing labor costs. Additionally, the analysis uncovers substantial cross-country heterogeneity in the relationship between markups, markdowns, and the labor share.

Keywords: product markup; labor markdown; firms’ labor share. (search for similar items in EconPapers)
JEL-codes: D21 D22 J31 L12 (search for similar items in EconPapers)
Date: 2025-01-24, Revised 2025-01-24
New Economics Papers: this item is included in nep-com, nep-eec, nep-ind, nep-lma, nep-reg and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:123442

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