Aggregate Labor Share Research Articles

Information Technology and Returns to Scale

What are the implications of the dramatic fall in IT prices for aggregate technology? When firm-level technologies are continuously differentiable, a factor price shock leads to (i) a substitution between factors and/or (ii) an endogenous response of returns to scale. The second channel is governed by the output elasticity of relative factor demand. Using detailed firm-level data from France, we estimate this elasticity to be positive for IT factor demand. A quantitative exercise accounting for both technological channels shows that falling IT prices can explain much of the changes in concentration and the composition of aggregate labor share in France. (JEL D22, D24, D33, E25, L63, L86)

Measuring the technological bias of robot adoption and its implications for the aggregate labor share

This paper investigates the technological bias of robot adoption using a rich panel data set of Spanish manufacturing firms over a 25-year period. We apply the production function estimation when productivity is multidimensional to the case of an automating technology, to reveal the Hicks-neutral and labor-augmenting technological change brought about by robot adoption within firms. Our results indicate a causal effect of robots on Hicks-neutral and labor-augmenting components of productivity. The biased technological change turns out to be an important determinant of the decline in the aggregate share of labor in the Spanish manufacturing sector.

The Race Between Preferences and Technology

This paper argues that a unified analysis of consumption and production is required to understand the long‐run behavior of the U.S. labor share. First, using household data on the universe of consumer spending, I document that higher‐income households spend relatively more on labor‐intensive goods and services as a share of their total consumption. Interpreted as nonhomothetic preferences, this fact implies that economic growth increases the aggregate labor share through an income effect. Second, using disaggregated data on factor shares and capital intensities, I document that equipment‐intensive goods experienced relatively larger declines in their labor shares. Based on this finding, I estimate that capital and labor are gross substitutes, and that investment‐specific technical change reduces the labor share. Given the estimated elasticities, a parsimonious neoclassical model quantitatively matches the observed low‐frequency movements in the aggregate labor share since the 1950s, both its relative stability until about 1980 and its decline thereafter.

Labor share, foreign demand and superstar exporters

This paper proposes a new determinant of labor share changes. Using micro-data on the universe of French manufacturing exporters over 1995–2007, I show that a measure of export demand growth exogenous to firm-level outcomes drives down the manufacturing labor share through two effects. First, foreign demand shocks allow low-labor share, highly internationalized “superstar” exporters to grow disproportionately more. Second, foreign demand growth decreases the labor share of exporters and this effect is stronger for larger exporters. Both effects generate a sizable labor share decline, regardless of aggregate labor share dynamics. A simple heterogeneous-firm model with endogenous markups rationalizes my empirical results. Overall, these findings provide direct causal evidence of a “winner take most” phenomenon induced by trade globalization and emphasize the role of increased competition on international markets for labor share changes.

Testing the superstar firm hypothesis

ABSTRACT Firms with superior productivity, labeled superstar firms, are argued to be the link between rising concentration and the fall of the aggregate labor share in the US. This analysis confirms that similar evidence is found within the European context: the market share and firm size increase, whereas the labor share decreases with productivity. One of the much discussed mechanisms behind this development is the spreading of fixed overhead labor costs: Highly productive firms gain market share, and can simultaneously spread fixed overhead labor costs over more output, thereby reducing their own labor share and the aggregated labor share of the industry. We show that this mechanism can be tested empirically. However, using German firm-level data, we do not find any empirical evidence of it. Our analysis contributes to the ongoing debate by removing one of the proposed mechanisms from the list of potential explanations for the rise of superstar firms.

Productivity Dispersion, Between‐Firm Competition, and the Labor Share

I study the effect of labor market imperfections on the labor share in a tractable model that emphasizes the interaction between productivity dispersion and firm competition for workers. I calibrate the model using administrative data covering the universe of firms in Canada from 2000 to 2015. As in the data, most firms have a high labor share, yet the aggregate labor share is low due to the disproportionate effect of a small fraction of large, highly productive firms. I find that a rise in the dispersion of firm productivity causes the aggregate labor share to decline in favor of firm profits. The mechanism is that productivity dispersion effectively shields high‐productivity firms from wage competition. Regression evidence from cross‐country and cross‐industry data supports both the model prediction and mechanism.

From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship and the Labor Share

In the U.S., large firms now account for a greater share of economic activity, new firms are being created at slower rates, and workers are receiving a smaller share of GDP. Changes in population growth provide a unified quantitative explanation. A decrease in population growth lowers firm entry rates, shifting the firm‐age distribution toward older firms. Firm aging accounts for (i) the concentration of employment in large firms, (ii) and trends in average firm size and exit rates, key determinants of firm entry rates. Feedback effects from firm demographics generate two‐thirds of the effect. Prior to the decrease, entry rates rose steadily reflecting the earlier baby boom. The glut of firms due to the baby boom lead to rich transitional dynamics within the feedback effects, accounting for more than half the total change. Baby boom induced changes in the firm‐age distribution provide a driving force for the post‐WWII rise and fall in the aggregate labor share. Ignoring changes in population growth attributes all the long run decline in entry rates to a decrease in firm exit rates, which in reality have been only one‐third as large.

Heterogeneous Policy Distortions and the Labor Share

I develop an extension of the neoclassical growth model in which firms are heterogeneous both in terms of labor share and productivity. In this model, distortions in the allocation of resources across firms can impact the labor share of national income. Using administrative firm-level data to calibrate the model, I show in particular that a removal of policies reducing the output price of more productive firms can generate a sizable decrease in the aggregate labor share (between 1 and 4 percentage points). My results suggest that the recent decline in the global labor share of income is both qualitatively and quantitatively consistent with an improvement in resource allocation across firms.

Not a Typical Firm: The Joint Dynamics of Firms, Labor Shares, and Capital–Labor Substitution

The decline in the U.S. labor share is far from uniform across firms. While the aggregate labor share has declined, especially in manufacturing, retail, and wholesale, the labor share of a typical firm in these industries has risen. This paper studies the dynamics of the substitution of capital for labor at the firm level and its implications for market structure and labor shares. We introduce a model of firm dynamics where firms make costly upfront investments to adopt the capital-intensive technologies required to automate additional tasks. Following a decline in the price of capital, large firms automate more of their tasks and become more capital intensive; while the median firm continues to operate a more labor-intensive technology. In line with firm-level data, our model generates transitions in which the labor share of the median firm increases at the same time as the aggregate labor share declines. We use an extension of our model that allows for endogenous markups to study the role of rising competition and reallocation towards more productive and higher-markup firms as another driver of the decline in the labor share during 1982–2012. We provide a quantitative decomposition showing that reallocation played a minor role in explaining the decline in the labor share in U.S. manufacturing but an important role in retail and other sectors. The substitution of labor with cheaper capital in a widening range of tasks played a more dominant role in explaining the decline of the manufacturing labor share.

Aggregate Labor Share and Tax Havens: Things Are Not Always What They Seem

Aggregate Labor Share and Tax Havens: Things Are Not Always What They Seem

How Does Automation Affect Aggregate Labor Share and Firm Level Economic Outcomes?

Automation technologies displace human labor from various production processes, but they also reinstate labor by creating new tasks. These perpetual developments create changes in the task content performed by human labor. (Acemoglu and Restrepo 2019) provide a methodology to measure these changes in task content in industry level. In this article, I first drop the competitive market assumption that is present in their methodology and factor out markup effects from their measurement of change in task content. I find that the observed decrease in labor share is due to the combination of markup effect and change in task content. Moreover, I use this methodology to obtain firm level measures of change in task content and analyze its effect on profits and firm size. I find that profits are increasing with technologies that displace human labor. By further decomposing displacement and reinstatement effects from the change in task content of production, I find that firm size measured as sales increase with displacement. There is no significant effect of displacement or reinstatement when firm size is measured as number of employees. However, controlling for firm sale changes in the regressions regarding number of employees reveal that firms that displaced more labor shrank with respect to their number of employees.

Heterogeneous policy distortions and the labor share

I develop an extension of the neoclassical growth model in which firms are heterogeneous both in terms of labor share and productivity. In this model, distortions in the allocation of resources across firms can impact the labor share of national income. Using administrative firm-level data to calibrate the model, I show in particular that a removal of policies reducing the output price of more productive firms can generate a sizable decrease in the aggregate labor share (between 1 and 4 percentage points). My results suggest that the recent decline in the global labor share of income is both qualitatively and quantitatively consistent with an improvement in resource allocation across firms.

Market Power and Labor Share

Secular trends in market power and labor share have important implications for inequality and allocative efficiency. Studying them requires comprehensive and detailed firm-level data spanning several decades. For that purpose, we leverage a novel and detailed database on the universe of French firms between 1984 and 2016, that we use to document a rise in concentration in France since the beginning of the 1990s. Despite a relative stability of the aggregate labor share, we show that firms with lower labor shares have been gaining market shares. As low labor share firms also tend to be larger, this market share reallocation has been stronger in industries where concentration increased the most. We rely on markups as proxies of firm-level market power, and on a flexible production function that allows the identification of firm-specific output elasticities and markups. We find that the markup of the typical firm has decreased, but the reallocation of market shares toward larger firms contributed to an increase of the aggregate markup. Finally, we show how taking into account reallocation across firms is essential to understand how the aggregate market power evolution has shaped the dynamics of the aggregate labor share in France.

Openness and factor shares: Is globalization always bad for labor?

This paper studies the response of factor shares to the liberalization episode in India during the 1990's, which is characterized by large and unexpected changes in trade and foreign investment policies. We find that access to foreign capital caused an increase in the labor-to-capital relative factor share. As lower tariffs on capital goods and FDI liberalization reduce the cost of foreign capital, firms increase their use of foreign capital relative to domestic capital. This shift in the composition of the capital stock improves capital's productivity per unit of expenditure, which in turn raises wages and the relative labor share. Consistent with this mechanism, firm TFP and the share of firms that import capital both increase in industries with the largest capital cost reductions, while the relatively larger rise of labor payments is observed predominantly for new capital importers. We identify domestic deregulation policies and reallocation to capital-intensive firms as potential determinants of the observed decline in the aggregate labor share. Finally, in a model where domestic and foreign capital are imperfect substitutes, we quantify the effect of a reduction in capital tariffs, and find that it explains a large part of the estimated increase in the labor share found in the reduced form analysis.

What drives labor share change? Evidence from Korean industries

Using aggregate- and industry-level data, this study shows the role of factor substitution and technological progress in labor share change in Korea over the past 30 years. Aggregate labor share shows a declining trend while masking the divergence in labor share at the industry level. The industry-level analysis provides evidence that in major capital-intensive industries with high substitutability between capital and labor such as electronics, an increase in the capital-to-labor ratio tends to be associated with a fall in the labor share. Given their rapid growth in value-added, these industries play a key role in the declining aggregate labor share. Service industries such as finance, with rapid labor-augmenting technological progress and low substitutability, have also contributed to the declining aggregate labor share.

What drives the labor share of income in South Korea? A regional analysis

AbstractThis study takes a regional approach to analyzing what drives labor's share of income for South Korea over 2000–2014. First, we document empirically that changes in the labor share within a region are the dominant component of the change in the aggregate labor share of national income. To study the dynamic determinants of the labor share of income at the regional level, a panel vector autoregression (PVAR) model is estimated to examine how the regional labor share responds to innovations in an array of variables suggested by theoretical models. Consistent with theory, we confirm that technology, capital intensity and market concentration are the key variables explaining the labor share dynamics. Furthermore, we analyze the effects of trade openness and R&D expenditures on the regional labor share. Interestingly, we find that the labor share shows a different pattern of responses to the identified shocks depending upon the type of regions, that is, whether it is in the metropolitan or provincial areas. We also discuss the implications of our results for both theory and policy.

Information Technology and Returns to Scale

Disciplined by detailed firm-level data from France, we study the response of the macroeconomy to the dramatic fall observed in IT prices from 1990 to 2007. Our model of industry dynamics with heterogeneous firms accounts for the novel fact that demand for hardware and software, when compared to other inputs, is more elastic in firm size. We show that this nonhomotheticity has important consequences for firm-level returns to scale and for the aggregate response. In our calibration, falling IT prices quantitatively explain around half of the changes in concentration and in the composition of aggregate labor share in France.

Mudança estrutural, preços relativos e distribuição funcional da renda: o caso brasileiro (1995-2009)*

Resumo Este trabalho analisa o papel das transformações da estrutura produtiva sobre a evolução da parcela do trabalho na renda agregada no Brasil no período 1995-2009. Foi realizada uma decomposição estrutural do crescimento da parcela do trabalho, isolando o efeito das alterações na composição setorial da renda real dos efeitos relacionados aos ajustes dos preços relativos e à trajetória do salário médio real em relação à produtividade. As mudanças na composição setorial da renda tiveram um papel relevante para a evolução da participação das rendas do trabalho. Entretanto, essas mudanças se deram principalmente pelas alterações na estrutura de preços relativos mais do que por mudanças na composição real da renda. Por fim, observou-se que estes resultados podem ser associados às mudanças institucionais ocorridas no período, em especial às privatizações na década de 1990 e à política de valorização do salário mínimo real nos anos 2000.

Jobless and Wageless Growth: The Composition Effects of Credit Easing

The period of jobless and wageless growth that followed the great recession in the United States raises the question why expansionary credit policies were less effective for the recovery in employment and real wages in comparison to output. Using a structural time series analysis of the US credit and labor markets since 1965, I find that, indeed, credit supply expansions have been associated with a negative impact on the aggregate labor share. This paper offers one explanation that relies on the composition effects of credit expansion. I provide evidence that the pass-through of aggregate credit supply fluctuations to employment growth is stronger for industries that face higher borrowing costs. Firms in these industries prefer collateralizable capital to labor, and pay lower wages. Consequently, by increasing their share in total output and employment, the change in composition following an expansion in credit supply exerts negative pressure on the aggregate labor share. I build a dynamic model of heterogeneous firms and an aggregate financial sector, which accounts for the interaction between financial and labor market frictions. The model reproduces the negative composition effects of an aggregate credit supply expansion, and reconciles them with the positive within-firm effects predicted by models that abstract from the role of financial heterogeneity across firms. The paper, therefore, raises the concern that credit easing may not target firms that have strong potential to hire or pay high wages.

Unemployment and the labor share

The labor share fluctuates over the business cycle. To explain this behavior, we develop a novel model featuring direct competition between heterogeneous firms to hire workers. This simultaneously endogenizes both average match productivity and the division of output between workers and firms. In existing matches, wages partly reflect labor market conditions at the time of hiring. A positive TFP shock therefore reduces the aggregate labor share, making it counter-cyclical. However, greater competition and lower unemployment increase labor’s share among new firms. As more firms enter, the aggregate labor share rises and eventually overshoots its initial level, as in the data.