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Labor’s Share, the firm’s market power and TFP

Author

Listed:
  • Robert Dixon

    (Department of Economics, University of Melbourne)

  • Guay C. Lim

    (Melbourne Institute of Applied Economic and Social Research, University of Melbourne)

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 TFP growth which is informative about the extent of the downwards bias inherent in traditional estimates which use labor’s share as a proxy for the elasticity.

Suggested Citation

  • Robert Dixon & Guay C. Lim, 2018. "Labor’s Share, the firm’s market power and TFP," Department of Economics - Working Papers Series 2038, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:2038
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    More about this item

    Keywords

    Labor’s share; Market power; TFP growth; Labor wedge; State-space modelling;
    All these keywords.

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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