Markups, labor market inequality and the nature of work

We develop a framework for understanding the effects of a change in markups on the income distribution. We demonstrate the importance of distinguishing between production and expansionary uses of labor for this question. An increase in markups redistributes earnings away from production labor and toward expansionary labor, and has an ambiguous effect on the overall labor share that depends on the relative importance of production and expansionary activities in the aggregate economy. We measure the production and expansionary content of different occupations from the co-movement of occupational income shares with markup-induced changes in the labor share. We find that around one-fifth of US labor income compensates expansionary activities, and that occupations with larger expansionary content have experienced the fastest wage and employment growth since 1980. Our framework can be applied more generally to study the distributional implications of shocks, policies and secular forces that affect the economy by changing markups.