Productivity Dispersion, Between-firm Competition and the Labor Share

In this paper, I study how the pass-through of productivity to wages depends on the distribution of productivity across firms. Using administrative data covering the universe of Canadian corporations, I document high concentration of value added within highly productive, low-labor-share firms. Importantly, these large firms do not have a higher capital-output ratio and achieve a low labor share despite paying above average salaries. To interpret these findings, I develop a tractable firm dynamics model (à la Hopenhayn 1992) with search frictions and wage posting in the labor market (à la Burdett and Mortensen 1998). In the model, more productive firms offer higher wages in order to increase their market share by poaching workers from lower paying firms. As in the data, most firms have a high labor share, routinely above one, yet the aggregate labor share is low due to the disproportionate effect of a small fraction of large, extremely productive ``superstar firms''. The model predicts that the pass-through of aggregate labor productivity to average wages is lower when productivity dispersion across firm is high, meaning that all else equal, an increase in productivity dispersion decreases the aggregate labor share. The mechanism is that an increase in the productivity differential between high and low productivity firms increases profit margins at high productivity firms, who become effectively shielded from wage competition. I test the model's prediction and mechanism using cross-country data and find support, thus suggesting that the measured rise in productivity dispersion has contributed to the decline of the global labor share.