Factor Shares, the Price Markup, and the Elasticity of Substitution Between Capital and Labor
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Raurich, Xavier; Sala, Hector; Sorolla, Valeri
The labor income share is constant under the assumptions of a Cobb-Douglas production function and perfect competition. This paper relaxes these assumptions and investigates to what extent the actual non-constant behavior of this factor share is explained by (i) a non-unitary elasticity of substitution between capital and labor and (ii) non-perfect competition in the product market. We focus on Spain and the U.S. and estimate a constant elasticity of substitution production function under imperfect competition in the product market. The degree of imperfect competition is measured through a time series computation of the price markup following the dual approach. We show that the elasticity of substitution is above one in Spain and below one in the US. We also show that the price markup drives the elasticity of substitution away from one, upwards in Spain, downwards in the U.S. These results are used to explain the declining path of the labor income share, common to both economies, and their contrasted patterns in terms of capital deepening.
elasticity of substitution; price markup; factor shares; capital deepening
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