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

  • Xavier Raurich


    (Departament de Teoria Econòmica, Universitat de Barcelona and CREB)

  • Hector Sala


    (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona and IZA)

  • Valeri Sorolla


    (Departament d’Economia i d’Història Econòmica, Universitat Autonoma de Barcelona)

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 U.S. and show that the elasticity of substitution is above one in Spain and below one in the U.S. We also show that the price markup drives the elasticity of substitution away from one, upwards in Spain, downwards in the U.S. 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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Paper provided by Department of Applied Economics at Universitat Autonoma of Barcelona in its series Working Papers with number wpdea1109.

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Length: 33 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:uab:wprdea:wpdea1109
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