We develop, estimate, and test a tractable general equilibrium model of oligopsony with differentiated jobs and concentrated labor markets. We estimate key model parameters by matching new evidence on the relationship between firms’ local labor market share and their employment and wage responses to state corporate tax changes. The model quantitatively replicates quasi-experimental evidence on imperfect productivity-wage pass-through and strategic wage setting of dominant employers. Relative to the efficient allocation, welfare losses from labor market power are 7.6 percent, while output is 20.9 percent lower. Lastly, declining local concentration added 4 percentage points to labor’s share of income between 1977 and 2013. (JEL E25, H71, J24, J31, J42, R23)
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The Rise of Pass-Throughs and the Decline of the Labor Share
We study the coevolution of the fall in the US corporate-sector labor share and the rise of business activity in tax-preferred pass-throughs. We find that reallocating activity to the form it would have taken prior to the Tax Reform Act of 1986 accounts for one-third of the decline in the corporate-sector labor share between 1978 and 2017. Our adjustments are concentrated among mid-market firms in services, magnifying the role of the manufacturing sector and superstar firms in driving the remaining decline in the labor share. Our findings highlight the importance of tax policy when measuring factor shares. (JEL D22, E25, H25, K34, L60, L80)
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- Award ID(s):
- 1752431
- PAR ID:
- 10408580
- Date Published:
- Journal Name:
- American Economic Review: Insights
- Volume:
- 4
- Issue:
- 3
- ISSN:
- 2640-205X
- Page Range / eLocation ID:
- 323 to 340
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
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