Copyright Page
© 2023 International Monetary Fund
WP/23/32
IMF Working Paper
Finance Department
Production Technology, Market Power, and the Decline of the Labor Share Prepared by Agustin Velasquez*
Authorized for distribution by Charleen Gust February 2023
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: The labor share has been declining in the United States, and especially so in manufacturing. This paper investigates the role of capital accumulation and market power in explaining this decline. I first estimate the production function of 21 manufacturing sectors along time series and including time-varying markups. The elasticities of substitution for most sectors are estimated below one, implying that capital deepening cannot explain the labor share decline. I then track the long-run evolution of the labor share using the estimated production technology parameters. I decompose aggregate labor share changes into sector re-weights, capital-labor substitution, and market power effects. I find that the increase in market power, as reported in recent studies, can account for, at least, 76 percent of the labor share decline in manufacturing. Absent the rise in market power, the labor share would have remained constant in the second half of the 20th century.
| JEL Classification Numbers: | E21, E22, E25 |
| Keywords: | Labor share; elasticity of substitution; capital accumulation; market power |
| Author’s E-Mail Address: | avelasquez@imf.org |
| JEL Classification Numbers: | E21, E22, E25 |
| Keywords: | Labor share; elasticity of substitution; capital accumulation; market power |
| Author’s E-Mail Address: | avelasquez@imf.org |
The author would like to especially thank Ugo Panizza, Rahul Mukherjee, and Nicolas Depetris-Chauvin. This paper received helpful comments and suggestions from Bas Bakker, Timo Boppart, Julia Cajal Grossi, Mariarosaria Comunale, Gabriela Cugat, Mert Demirer, Woori Lee, Miguel Leon-Ledesma, Flavien Moreau, Chris Papageorgiou, Francesco Pappada, Samuel Pienknagura, Daniele Rinaldo, Nayantara Sarma and the participants of the 19th RIEF meetings, IHEID BBL, and the IMF RESDM seminar. All errors are his own.