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Does Capital-Labor Substitution or Do Institutions Explain Declining Labor Shares

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  • Daniel Berkowitz

Abstract

Labor shares have been declining around the world since the 1980s and there are severalexplanations for this. Karabarbounis and Neiman (2014) highlight the role of a high substi-tutability between capital and labor that enables firms to easily replace labor with capital asthe rental-wage ratio falls. However, Acemoglu and Robinson (2015) argue that political factorsshaping the evolution of institutions can be more important than the automation of productionprocesses. Using firm-level data from China, we study the relative importance of capital-laborsubstitution and institutional changes. To account for firm-level heterogeneity, we examine theevolution of labor-share distributions during 1998-2007. We find that labor market reforms inthe state sector and product market de-regulation that smoothed the way for the rapid growthof the private sector can explain the majority of the decline in labor shares. Our results forChina are consistent with the findings in Autor et al (2017) for the United States that theemergence of "superstar" firms that are large, have high markups and low labor shares drivedeclining labor shares.

Suggested Citation

  • Daniel Berkowitz, 2017. "Does Capital-Labor Substitution or Do Institutions Explain Declining Labor Shares," Working Paper 6060, Department of Economics, University of Pittsburgh.
    • Handle: RePEc:pit:wpaper:6060
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    Cited by:

    1. Luis Díez Catalán, 2018. "The labor share in the service economy," Working Papers 18/09, BBVA Bank, Economic Research Department.
    2. David Autor & David Dorn & Lawrence F Katz & Christina Patterson & John Van Reenen, 2020. "The Fall of the Labor Share and the Rise of Superstar Firms [“Automation and New Tasks: How Technology Displaces and Reinstates Labor”]," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(2), pages 645-709.
    3. Corbellini, Aldo & Magnani, Marco & Morelli, Gianluca, 2021. "Labor market analysis through transformations and robust multivariate models," Socio-Economic Planning Sciences, Elsevier, vol. 73(C).
    4. Li, Bing & Liu, Chang & Sun, Stephen Teng, 2021. "Do corporate income tax cuts decrease labor share? Regression discontinuity evidence from China," Journal of Development Economics, Elsevier, vol. 150(C).
    5. Chih‐Hai Yang & Meng‐Wen Tsou, 2021. "Globalization and the labor share in China: Firm‐level evidence," Manchester School, University of Manchester, vol. 89(1), pages 1-23, January.
    6. Matthias Kehrig & Nicolas Vincent, 2021. "The Micro-Level Anatomy of the Labor Share Decline," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(2), pages 1031-1087.

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