IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

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

Author Info

Listed author(s):
  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0164070411000668
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 1 ()
Pages: 181-198

as
in new window

Handle: RePEc:eee:jmacro:v:34:y:2012:i:1:p:181-198
DOI: 10.1016/j.jmacro.2011.09.004
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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

Other versions of this item:

Find related papers by 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

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Gali, Jordi, 1995. "Product diversity, endogenous markups, and development traps," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 39-63, August.
  2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, April.
  3. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 47-104, 04.
  4. Sumru Altug & Alpay Filiztekin, 2002. "Scale effects, time-varying markups, and the cyclical behaviour of primal and dual productivity," Applied Economics, Taylor & Francis Journals, vol. 34(13), pages 1687-1702.
  5. Karanassou, Marika & Sala, Hector & Snower, Dennis, 2003. "Unemployment in the European Union: a dynamic reappraisal," Economic Modelling, Elsevier, vol. 20(2), pages 237-273, March.
  6. Juan J Dolado & Carlos Garcia--Serrano & Juan F. Jimeno, 2002. "Drawing Lessons From The Boom Of Temporary Jobs In Spain," Economic Journal, Royal Economic Society, vol. 112(721), pages 270-295, June.
  7. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  8. Revankar, Nagesh S, 1971. "A Class of Variable Elasticity of Substitution Production Functions," Econometrica, Econometric Society, vol. 39(1), pages 61-71, January.
  9. Jaimovich, Nir & Floetotto, Max, 2008. "Firm dynamics, markup variations, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1238-1252, October.
  10. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  11. Jordi GalÎ, 1996. "Multiple equilibria in a growth model with monopolistic competition (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 251-266.
  12. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
  13. Duffy, John & Papageorgiou, Chris, 2000. "A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
  14. Chang-Tai Hsieh, 1999. "Productivity Growth and Factor Prices in East Asia," American Economic Review, American Economic Association, vol. 89(2), pages 133-138, May.
  15. W. Diewert & Alice Nakamura, 2003. "Index Number Concepts, Measures and Decompositions of Productivity Growth," Journal of Productivity Analysis, Springer, vol. 19(2), pages 127-159, April.
  16. Morten Ravn & Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Deep Habits," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 195-218.
  17. Bentolila Samuel & Saint-Paul Gilles, 2003. "Explaining Movements in the Labor Share," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-33, October.
  18. Banerjee, Anindya & Russell, Bill, 2004. "A reinvestigation of the markup and the business cycle," Economic Modelling, Elsevier, vol. 21(2), pages 267-284, March.
  19. Daron Acemoglu, 2002. "Directed Technical Change," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 781-809.
  20. Alfonso Arpaia & Esther Pérez & Karl Pichelmann, 2009. "Understanding Labour Income Share Dynamics in Europe," European Economy - Economic Papers 2008 - 2015 379, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  21. Susanto Basu & John Fernald, 2001. "Why Is Productivity Procyclical? Why Do We Care?," NBER Chapters,in: New Developments in Productivity Analysis, pages 225-302 National Bureau of Economic Research, Inc.
  22. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-855, December.
  23. Ángel Estrada & David López-Salido, 2005. "Sectoral mark-up dynamics in Spain," Working Papers 0503, Banco de España;Working Papers Homepage.
  24. Winford H. Masanjala & Chris Papageorgiou, 2004. "The Solow model with CES technology: nonlinearities and parameter heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(2), pages 171-201.
  25. Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(1), pages 41-56, March.
  26. Roeger, Werner, 1995. "Can Imperfect Competition Explain the Difference between Primal and Dual Productivity Measures? Estimates for U.S. Manufacturing," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 316-330, April.
  27. Chang-Tai Hsieh, 2002. "What Explains the Industrial Revolution in East Asia? Evidence From the Factor Markets," American Economic Review, American Economic Association, vol. 92(3), pages 502-526, June.
  28. Claude Diebolt & Faustine Perrin, 2014. "Growth Theories," Working Papers 02-14, Association Française de Cliométrie (AFC).
  29. Rowthorn, Robert, 1999. "Unemployment, Wage Bargaining and Capital-Labour Substitution," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 413-425, July.
  30. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135 Elsevier.
  31. Driver, Ciaran & Muñoz-Bugarin, Jair, 2010. "Capital investment and unemployment in Europe: Neutrality or not?," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 492-496, March.
  32. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
Full references (including those not matched with items on IDEAS)

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

as
in new window


Cited by:

  1. Anthony Diercks, 2016. "The Equity Premium, Long-Run Risk, and Optimal Monetary Policy," 2016 Meeting Papers 207, Society for Economic Dynamics.
  2. 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.
  3. Deren Unalmis & Ibrahim Unalmis & Filiz Unsal, 2012. "On the Sources and Consequences of Oil Price Shocks; The Role of Storage," IMF Working Papers 12/270, International Monetary Fund.
  4. Gabriel Ahlfeldt & Daniel McMillen, 2014. "New Estimates of the Elasticity of Substitution of Land for Capital," ERSA conference papers ersa14p108, European Regional Science Association.
  5. 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.
  6. repec:spr:eurasi:v:4:y:2014:i:1:p:3-30 is not listed on IDEAS
  7. repec:spr:pharme:v:4:y:2014:i:1:p:3-30 is not listed on IDEAS
  8. 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.
  9. 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).
  10. McAdam, Peter & Muck, Jakub & Growiec, Jakub, 2015. "Will the true labor share stand up?," Working Paper Series 1806, European Central Bank.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Access and download statistics

When requesting a correction, please mention this item's handle: RePEc:eee:jmacro:v:34:y:2012:i:1:p:181-198. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.