Factor shares, the price markup, and the elasticity of substitution between capital and labor

Xavier Raurich ^[1] ; Hector Sala ^[2] ; Valeri Sorolla ^[2]
1. [1] Universitat de Barcelona
  
  Universitat de Barcelona
  
  Barcelona, España
2. [2] Universitat Autònoma de Barcelona
  
  Universitat Autònoma de Barcelona
  
  Barcelona, España
Localización: Working papers (Universitat Autònoma de Barcelona. Departament d'Economia Aplicada), Nº. 9, 2011
Idioma: inglés
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Resumen
- In a Walrasian labor market, the labor income share is constant under the as-sumptions of a Cobb-Douglas production function and perfect competition. Giventhe observed decline of the labor share in recent decades, this paper relaxes theseassumptions, proposes a time-series calculation of the aggregate price mark-up re-flecting the degree of imperfect competition in the product market, and providesestimates of the elasticityof substitution under such product market imperfections.We focus on Spain and the U.S. and show that the elasticity of substitution isabove one in Spain and below one in the U.S. We also show that the price markupdrives the elasticity of substitution away from one, upwards in Spain, downwardsin the U.S. These results are used to explain the declining path of the labor incomeshare, common to both economies, and their contrasted patterns in terms of capitaldeepening.