Advanced

Rising markups and the fall of the labor share: Predicting the effects of industry market power in the U.S.

Grenestam, Erik LU and Probst, Julius LU (2014) NEKP01 20141
Department of Economics
Abstract
This paper examines the downward trend in the U.S. labor share of income, which is shown to have declined significantly over the last two decades. This phenomenon is in direct contradiction with standard neoclassical growth theory, which postulates constant factor shares of income. Increased trade with low-income countries, financialization, and the decline of labor unions are some of the explanations that have been put forward, sometimes with ambiguous evidence. We develop a model to examine the effect of a rise in the markup of firms on the labor share. Increasing markups imply that monopoly rents rise at the expense of labor and also capital income. This result holds if the economy is characterized by a Cobb-Douglas production function... (More)
This paper examines the downward trend in the U.S. labor share of income, which is shown to have declined significantly over the last two decades. This phenomenon is in direct contradiction with standard neoclassical growth theory, which postulates constant factor shares of income. Increased trade with low-income countries, financialization, and the decline of labor unions are some of the explanations that have been put forward, sometimes with ambiguous evidence. We develop a model to examine the effect of a rise in the markup of firms on the labor share. Increasing markups imply that monopoly rents rise at the expense of labor and also capital income. This result holds if the economy is characterized by a Cobb-Douglas production function or a CES (constant elasticity of substitution) production function. We use both a standard regression as well as a Bayesian approach to estimate U.S. industry markups over time. Our results suggest that markups in the private sector might have risen by as much as 7 to 12 percent from the early 1980s until today. Moreover, this significant aggregate increase in monopoly power can explain almost the entire fall of the U.S. labor share over the same time period. (Less)
Please use this url to cite or link to this publication:
author
Grenestam, Erik LU and Probst, Julius LU
supervisor
organization
course
NEKP01 20141
year
type
H2 - Master's Degree (Two Years)
subject
keywords
labor share markup monopoly market power production function returns to scale
language
English
id
4617196
date added to LUP
2014-09-22 13:45:38
date last changed
2014-09-22 13:45:38
@misc{4617196,
  abstract     = {This paper examines the downward trend in the U.S. labor share of income, which is shown to have declined significantly over the last two decades. This phenomenon is in direct contradiction with standard neoclassical growth theory, which postulates constant factor shares of income. Increased trade with low-income countries, financialization, and the decline of labor unions are some of the explanations that have been put forward, sometimes with ambiguous evidence. We develop a model to examine the effect of a rise in the markup of firms on the labor share. Increasing markups imply that monopoly rents rise at the expense of labor and also capital income. This result holds if the economy is characterized by a Cobb-Douglas production function or a CES (constant elasticity of substitution) production function. We use both a standard regression as well as a Bayesian approach to estimate U.S. industry markups over time. Our results suggest that markups in the private sector might have risen by as much as 7 to 12 percent from the early 1980s until today. Moreover, this significant aggregate increase in monopoly power can explain almost the entire fall of the U.S. labor share over the same time period.},
  author       = {Grenestam, Erik and Probst, Julius},
  keyword      = {labor share markup monopoly market power production function returns to scale},
  language     = {eng},
  note         = {Student Paper},
  title        = {Rising markups and the fall of the labor share: Predicting the effects of industry market power in the U.S.},
  year         = {2014},
}