Rising markups and the fall of the labor share: Predicting the effects of industry market power in the U.S.
(2014) NEKP01 20141Department 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:
http://lup.lub.lu.se/student-papers/record/4617196
- author
- Grenestam, Erik LU and Probst, Julius LU
- supervisor
- organization
- course
- NEKP01 20141
- year
- 2014
- 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}}, 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}}, }