The mightier, the stingier: Firms’ market power, capital intensity, and the labor share of income

What determines the proportion of a firm’s income that workers receive as compensation? This paper uses longitudinal firm data from a period of substantial labor share variation to understand the firm-level determinants of the labor share of income—a question that has so far only been addressed with country- and sector-level data. Firms with greater market power and a higher ratio of capital to labor allocate a smaller proportion of their value added to workers. These results suggest that firm-level drivers play a key role in the evolution of the aggregate labor share, which have declined significantly since the 1970s.