Production Technology, Market Power, and the Decline of the Labor Share
IMF Working Papers, February 10, 2023
Source details
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- Production Technology, Market Power, and the Decline of the Labor Share
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Bibliographic details
- Authors: Agustin Velasquez
- Published: February 10, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400231919.001
Summary and central finding
- The labor share has been declining in the United States, and especially so in manufacturing.
- The paper investigates the roles of capital accumulation and market power in explaining this decline.
- The increase in market power 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.
Methodology and scope
- Estimation of the production function for 21 manufacturing sectors along time series and including time-varying markups.
- Elasticities of substitution are estimated sector-by-sector.
- Long-run evolution of the labor share is tracked using the estimated production technology parameters.
- Aggregate labor share changes are decomposed into:
- sector re-weights,
- capital-labor substitution,
- market power effects.
Key empirical results
- Elasticities of substitution for most sectors are estimated below one, implying that capital deepening cannot explain the labor share decline.
- Market power increase explains at least 76 percent of the labor share decline in manufacturing.
- Counterfactual: without the rise in market power, the labor share would have remained constant in the second half of the 20th century.
Subjects and keywords
- Subjects: Capital accumulation, Economic sectors, Income, Labor, Labor share, Manufacturing, National accounts
- Keywords: capital accumulation, capital share, capital-labor substitution, elasticity of substitution, Income, Labor share, labor share decline, Manufacturing, market power, market power effects, market power narrative, markup series
Content in this bundle
- Working Paper