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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.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

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

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

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

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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

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Cited by:

  1. repec:spr:eurasi:v:4:y:2014:i:1:p:3-30 is not listed on IDEAS
  2. Deren Unalmis & Ibrahim Unalmis & Derya Filiz Unsal, 2012. "On the Sources and Consequences of Oil Price Shocks : The Role of Storage," Working Papers 1230, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  3. 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.
  4. repec:spr:pharme:v:4:y:2014:i:1:p:3-30 is not listed on IDEAS
  5. Philippon, Thomas, 2014. "Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," CEPR Discussion Papers 9792, C.E.P.R. Discussion Papers.
  6. Muck, Jakub & McAdam, Peter & Growiec, Jakub, 2015. "Will the true labor share stand up?," Working Paper Series 1806, European Central Bank.
  7. 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.
  8. Gabriel Ahlfeldt & Daniel McMillen, 2014. "New Estimates of the Elasticity of Substitution of Land for Capital," ERSA conference papers ersa14p108, European Regional Science Association.
  9. Anthony Diercks, 2016. "The Equity Premium, Long-Run Risk, and Optimal Monetary Policy," 2016 Meeting Papers 207, Society for Economic Dynamics.

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