Declining Labor Shares and Heterogeneous Firms

There is evidence that laborís share of income has been declining in many countries since the 1980s. While theoretical explanations for declining labor shares use models with representative firms, this paper proposes a model in which firms can be heterogeneous in terms of capital-intensity, market power, ownership, and productivity. Using theoretical insights from Azmat, Manning and Van Reenen (2012), Blanchard and Giavazzi (2003) and Karabarbounis and Neiman (2014) and econometric methods from De Loecker and Warzynski (2012), we find that the rightward shift in the distribution of market power for private firms, the rightward shift in the distribution of capital intensity for all firms, and the declining political pressure on state owned firms to protect jobs have all contributed to the decline in labor shares in China's manufacturing sector.