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Not a Typical Firm: Capital–Labor Substitution and Firms' Labor Shares

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  • Joachim Hubmer
  • Pascual Restrepo

Abstract

The US labor share has declined, especially in manufacturing and retail. Yet the labor share of a typical firm in these sectors has risen. We introduce a model where firms incur fixed costs to automate tasks. A decline in the price of capital goods used for automation reproduces the observed patterns: large firms automate tasks, reducing the aggregate labor share, while the median firm continues to operate a labor-intensive technology. When calibrating the automation fixed costs to match the observed adoption heterogeneity, the model generates the aggregate and firm-level facts quantitatively in response to lower capital prices, especially in manufacturing.

Suggested Citation

  • Joachim Hubmer & Pascual Restrepo, 2026. "Not a Typical Firm: Capital–Labor Substitution and Firms' Labor Shares," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(2), pages 34-71, April.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:2:p:34-71
    DOI: 10.1257/mac.20230325
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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