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

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  • Joachim Hubmer

    (University of Pennsylvania)

  • Pascual Restrepo

    (Boston University)

Abstract

The US labor share has declined, especially in manufacturing and retail. Yet, the labor share of a typical median firm in these sectors has risen. This paper introduces a model where firms incur fixed costs to automate tasks. In response to lower capital prices, the model reproduces the labor share patterns observed in the data: large firms automate more tasks, reducing the aggregate labor share; while the median firm continues to operate a labor-intensive technology with a rising labor share. Using our model, we decompose the labor share decline and the rise in sales concentration in each sector into a part driven by lower capital prices and a part driven by reallocation to higher-markup firms. Lower capital prices played a prominent role in explaining the labor share decline in manufacturing and a smaller role in retail and other sectors from 1982-2012.

Suggested Citation

  • Joachim Hubmer & Pascual Restrepo, 2023. "Not a Typical Firm:Capital-Labor Substitution and Firms' Labor Shares," PIER Working Paper Archive 23-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:23-015
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