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Factor shares, the price markup, and the elasticity of substitution between capital and labor

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  • Raurich, Xavier
  • Sala, Hector
  • Sorolla, Valeri

Abstract

In a Walrasian labor market, the labor income share is constant under the assumptions of a Cobb–Douglas production function and perfect competition. Given the observed decline of the labor share in recent decades, this paper relaxes these assumptions, proposes a time-series calculation of the aggregate price mark-up reflecting the degree of imperfect competition in the product market, and provides estimates of the elasticity of substitution under such product market imperfections. We focus on Spain and the US and show that the elasticity of substitution is above one in Spain and below one in the US. We also show that the price markup drives the elasticity of substitution away from one, upwards in Spain, downwards in the US. These results are used to explain the declining path of the labor income share, common to both economies, and their contrasted patterns in terms of capital deepening.

Suggested Citation

  • Raurich, Xavier & Sala, Hector & Sorolla, Valeri, 2012. "Factor shares, the price markup, and the elasticity of substitution between capital and labor," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 181-198.
    • Handle: RePEc:eee:jmacro:v:34:y:2012:i:1:p:181-198
    DOI: 10.1016/j.jmacro.2011.09.004
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    Cited by:

    1. Thomas Philippon, 2015. "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," American Economic Review, American Economic Association, vol. 105(4), pages 1408-1438, April.
    2. Anthony Diercks, 2016. "The Equity Premium, Long-Run Risk, and Optimal Monetary Policy," 2016 Meeting Papers 207, Society for Economic Dynamics.
    3. D., Ivan, 2017. "Stability of the labour shares: evidence from OECD economies," MPRA Paper 79822, University Library of Munich, Germany.
    4. Hector Sala & Pedro Trivín, 2018. "The effects of globalization and technology on the elasticity of substitution," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(3), pages 617-647, August.
    5. repec:bpj:bejmac:v:18:y:2018:i:1:p:16:n:9 is not listed on IDEAS
    6. Diercks, Anthony M., 2015. "The Equity Premium, Long-Run Risk, & Optimal Monetary Policy," Finance and Economics Discussion Series 2015-87, Board of Governors of the Federal Reserve System (US).
    7. Judzik, Dario & Sala, Hector, 2015. "The determinants of capital intensity in Japan and the US," Journal of the Japanese and International Economies, Elsevier, vol. 35(C), pages 78-98.
    8. Robert Rowthorn, 2014. "A Note on Piketty's Capital in the Twenty-First Century," Working Papers wp462, Centre for Business Research, University of Cambridge.
    9. repec:eee:eneeco:v:72:y:2018:i:c:p:166-176 is not listed on IDEAS
    10. repec:bla:jecsur:v:32:y:2018:i:4:p:961-984 is not listed on IDEAS
    11. Deren Unalmis & Ibrahim Unalmis & Filiz D Unsal, 2012. "On the Sources and Consequences of Oil Price Shocks; The Role of Storage," IMF Working Papers 12/270, International Monetary Fund.
    12. Francesco Carbonero & Christian Offermanns & Enzo Weber, 2017. "The Trend in Labour Income Share: the Role of Technological Change and Imperfect Labour Markets," Working Papers 173, Bavarian Graduate Program in Economics (BGPE).
    13. Gabriel Ahlfeldt & Daniel McMillen, 2014. "New Estimates of the Elasticity of Substitution of Land for Capital," ERSA conference papers ersa14p108, European Regional Science Association.
    14. Osharin Alexander & Verbus Valery, 2015. "Heterogeneous consumers and market structure in a monopolistically competitive setting," EERC Working Paper Series 15/03e, EERC Research Network, Russia and CIS.
    15. repec:spr:eurasi:v:4:y:2014:i:1:p:3-30 is not listed on IDEAS
    16. repec:spr:pharme:v:4:y:2014:i:1:p:3-30 is not listed on IDEAS
    17. Knoblach, Michael & Rößler, Martin & Zwerschke, Patrick, 2016. "The Elasticity of Factor Substitution Between Capital and Labor in the U.S. Economy: A Meta-Regression Analysis," CEPIE Working Papers 03/16, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    18. Jakub Mućk & Peter McAdam & Jakub Growiec, 2018. "Will The “True” Labor Share Stand Up? An Applied Survey On Labor Share Measures," Journal of Economic Surveys, Wiley Blackwell, vol. 32(4), pages 961-984, September.
    19. repec:spr:eurasi:v:4:y:2014:i:1:d:10.1007_s40821-014-0004-y is not listed on IDEAS

    More about this item

    Keywords

    Elasticity of substitution; Price markup; Factor shares; Capital deepening;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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