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Production Technology, Market Power, and the Decline of the Labor Share

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  • Agustin Velasquez

Abstract

The labor share has been declining in the United States, and especially so in manufacturing. This paper investigates the role of capital accumulation and market power in explaining this decline. I first estimate the production function of 21 manufacturing sectors along time series and including time-varying markups. The elasticities of substitution for most sectors are estimated below one, implying that capital deepening cannot explain the labor share decline. I then track the long-run evolution of the labor share using the estimated production technology parameters. I decompose aggregate labor share changes into sector re-weights, capital-labor substitution, and market power effects. I find that the increase in market power, as reported in recent studies, 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.

Suggested Citation

  • Agustin Velasquez, 2023. "Production Technology, Market Power, and the Decline of the Labor Share," IMF Working Papers 2023/032, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/032
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    Cited by:

    1. Swayamsiddha Sarangi, 2023. "Labor share decline across US manufacturing sub-sectors: 1979-2019," Working Paper Series, Department of Economics, University of Utah 2023_07, University of Utah, Department of Economics.

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    Keywords

    Labor share; elasticity of substitution; capital accumulation; market power; labor share decline; market power effects; capital-labor substitution; market power narrative; markup series; capital share; Manufacturing; Income;
    All these keywords.

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