Factor shares, the price markup, and the elasticity of substitution between capital and labor
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.
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.
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.
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.:
- Daron Acemoglu, 2002.
"Directed Technical Change,"
Review of Economic Studies,
Oxford University Press, vol. 69(4), pages 781-809.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991.
"Unemployment: Macroeconomic Performance and the Labour Market,"
Oxford University Press, number 9780198284345, December.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, December.
- Nir Jaimovich, 2004.
"Firm Dynamics, Markup Variations, and the Business Cycle,"
07-013, Stanford Institute for Economic Policy Research, revised Mar 2007.
- 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.
- Julio J. Rotemberg & Michael Woodford, 1999.
"The Cyclical Behavior of Prices and Costs,"
NBER Working Papers
6909, National Bureau of Economic Research, Inc.
- Dolado, Juan J. & Garcia-Serrano, Carlos & Jimeno, Juan F, 2001.
"Drawing Lessons From the Boom of Temporary Jobs in Spain,"
CEPR Discussion Papers
2884, C.E.P.R. Discussion Papers.
- 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 F270-F295, June.
- Juan José Dolado & Carlos García-Serrano & Juan F. Jimeno, . "Drawing Lessons from the Boom of Temporary Jobs in Spain," Working Papers 2001-11, FEDEA.
- Susanto Basu & John G. Fernald, 2000.
"Why is productivity procyclical? Why do we care?,"
Working Paper Series
WP-00-11, Federal Reserve Bank of Chicago.
- Susanto Basu & John Fernald, 2000. "Why Is Productivity Procyclical? Why Do We Care?," NBER Working Papers 7940, National Bureau of Economic Research, Inc.
- John G. Fernald & Susanto Basu, 1999. "Why is productivity procyclical? Why do we care?," International Finance Discussion Papers 638, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Morten Ravn & Stephanie Schmitt-Grohé & Martín Uribe, 2006.
Review of Economic Studies,
Oxford University Press, vol. 73(1), pages 195-218.
- Ravn, Morten O & Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Deep Habits," CEPR Discussion Papers 4269, C.E.P.R. Discussion Papers.
- Morten Ravn & Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Deep Habits," NBER Working Papers 10261, National Bureau of Economic Research, Inc.
- Morten O. Ravn & Stephanie Schmitt-Grohe, 2004. "Deep Habits," 2004 Meeting Papers 208, Society for Economic Dynamics.
- 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 316-30, April.
- Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2002.
"Unemployment in the European Union: A Dynamic Reappraisal,"
IZA Discussion Papers
531, Institute for the Study of Labor (IZA).
- 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.
- Karanassou, Marika & Sala, Héctor & Snower, Dennis J., 2003. "Unemployment in the European Union: A dynamic reappraisal," Open Access Publications from Kiel Institute for the World Economy 2933, Kiel Institute for the World Economy (IfW).
- Marika Karanassou & Hector Sala & Dennis J. Snower, 2002. "Unemployment in the European Union: A Dynamic Reappraisal," Working Papers 480, Queen Mary University of London, School of Economics and Finance.
- 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.
- Arpaia, Alfonso & Pérez, Esther & Pichelmann, Karl, 2009.
"Understanding labour income share dynamics in Europe,"
15649, University Library of Munich, Germany.
- Alfonso Arpaia & Esther PÃ©rez & 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.
- 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.
- Jordi GalÎ, 1996.
"Multiple equilibria in a growth model with monopolistic competition (*),"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 251-266.
- Gali, Jordi, 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 251-66, August.
- Galí, Jordi, 1993. "Multiple Equilibria in a Growth Model with Monopolistic Competition," CEPR Discussion Papers 751, C.E.P.R. Discussion Papers.
- Gali, Jordi, 1995.
"Product Diversity, Endogenous Markups and Development Traps,"
95-09, C.V. Starr Center for Applied Economics, New York University.
- Gali, Jordi, 1995. "Product diversity, endogenous markups, and development traps," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 39-63, August.
- Douglas Gollin, 2001.
"Getting Income Shares Right,"
Department of Economics Working Papers
2001-11, Department of Economics, Williams College.
- repec:afc:wpaper:02-14 is not listed on IDEAS
- 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.
- 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.
- Daveri, Francesco & Tabellini, Guido, 1997.
"Unemployment, Growth and Taxation in Industrial Countries,"
CEPR Discussion Papers
1681, C.E.P.R. Discussion Papers.
- Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 47-104, 04.
- Francesco Daveri & Guido Tabellini, . "Unemployment, Growth and Taxation in Industrial Countries," Working Papers 122, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Ángel Estrada & David López-Salido, 2005. "Sectoral mark-up dynamics in Spain," Working Papers 0503, Banco de España;Working Papers Homepage.
- Revankar, Nagesh S, 1971. "A Class of Variable Elasticity of Substitution Production Functions," Econometrica, Econometric Society, vol. 39(1), pages 61-71, January.
- 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 921-47, October.
- Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
- 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.
- Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(1), pages 41-56, March.
- 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.
- Bentolila, Samuel & Saint-Paul, Gilles, 1998. "Explaining Movements in the Labour Share," CEPR Discussion Papers 1958, C.E.P.R. Discussion Papers.
- Samuel Bentolila & Gilles Saint Paul, 1999. "Explaining movements in the labor share," Economics Working Papers 374, Department of Economics and Business, Universitat Pompeu Fabra.
- Bentollia, S. & Saint-Paul, G., 1999. "Explaining Movements in the Labor Share," Papers 9905, Centro de Estudios Monetarios Y Financieros-.
- Rowthorn, Robert, 1999. "Unemployment, Wage Bargaining and Capital-Labour Substitution," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 413-25, July.
- 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.
- 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.
- 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.
- Banerjee, Anindya & Russell, Bill, 2004. "A reinvestigation of the markup and the business cycle," Economic Modelling, Elsevier, vol. 21(2), pages 267-284, March.
- Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
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: (Shamier, Wendy)
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.