Monday, August 27, 2018

Firm Size, Concentration And The Labor Share

Lijun Zhu (Washington University in St. Louis) examines Firm Size, Concentration And The Labor Share.

ABSTRACT: The labor share has been declining for the last 20 to 25 years in U.S. This paper investigates the effect of industrial concentration on the decline of labor share, and quantify this effect. We document two empirical facts. First, there is a positive and significant correlation between the increase in concentration, measured as share of sales by large firms in a sector, and decrease in sectoral labor share from 1997 to 2012. Second, in average, the labor share for large firms is lower than small firms within the same sector. We propose the following explanation: large firms have lower labor share since they use more capital intensive technologies, which is supported by firm level data which reveals that capital-labor ratio is positively and significantly correlated with firm size, measured as sales, assets, and/or employees.; Mergers & Acquisitions, due to weakening of Anti-trust laws since 1980s, transfers market share from small to large firms, increases concentration ratio, and decreases labor share. A firm dynamics model that features merger and acquisition is developed. Production technologies are endogenized, with more productive firms choosing more capital intensive technology. Our quantitative exercise shows that the proposed mechanism explains 30-40% of the decrease in labor share from 1997 to 2012.

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