Labor's Share, the Firm's Market Power, and Total Factor Productivity

19 Pages Posted: 26 Sep 2018

See all articles by Robert John Dixon

Robert John Dixon

University of Melbourne - Department of Economics

Guay C. Lim

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Date Written: October 2018

Abstract

We investigate the relationship between labor's share, firm's market power, and the elasticity of output with respect to labor input using an approach based on an unobserved components model. The approach yields time‐varying estimates of market power and the elasticity. Evidence on the market power of firms (which we find to be rising since 2000) gives a deeper understanding of movements in labor's share and the labor wedge. The generated values of the elasticity yield revised estimates of total factor productivity growth which is informative about the extent of the downward bias inherent in traditional estimates which use labor's share as a proxy for the elasticity.

JEL Classification: O47, C32, E25

Suggested Citation

Dixon, Robert John and Lim, Guay C., Labor's Share, the Firm's Market Power, and Total Factor Productivity (October 2018). Economic Inquiry, Vol. 56, Issue 4, pp. 2058-2076, 2018, Available at SSRN: https://ssrn.com/abstract=3240842 or http://dx.doi.org/10.1111/ecin.12580

Robert John Dixon (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, VIC 3010
Australia
61 (0)3 83445352 (Phone)
61 (0)3 83446899 (Fax)

Guay C. Lim

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
161 Barry Street
Carlton, VIC 3053
Australia

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