Explaining movements of the labor share in the Korean economy: factor substitution, markups and bargaining power

Abstract

This paper emphasizes the role of market power, in both product and labor markets, in determining the labor share of income in the Korean economy. It presents an efficient bargaining model incorporating imperfect competition in product markets. This model shows how capital-labor substitution due to capital-augmenting technological progress or other factors, and changes in markups and the bargaining power of workers affect the labor share. Empirical analyses show that there is little support for explanations based on capital-labor substitution. Furthermore, a structural vector autoregression (VAR) model is proposed that can identify the effects of changes in markups and the bargaining power on the labor share. The VAR model applied to the period since the early 1980s demonstrates that both changes are influential, and especially for the manufacturing sector, long-run movements of the labor share are explained almost equally by variations in the markup and bargaining power.