Thursday, November 22, 2018

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

Robert John Dixon, The University of Melbourne - Department of Economics and Guay C. Lim, The University of Melbourne - Melbourne Institute of Applied Economic and Social Research explore Labor's Share, the Firm's Market Power, and Total Factor Productivity.

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.

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