Do higher price markups reduce labor’s share of income? Not necessarily.

Rising profit margins in the United States have coincided with a recent decline in labor’s share of income, but did higher price markups cause labor’s share to fall? Not necessarily, according to a new report from researchers at the Federal Reserve Bank of Cleveland and the Federal Reserve Board of Governors.

In the report, researchers Barış Kaymak and Immo Schott use a model of the US manufacturing sector to simulate what would happen if firms across the sector increased markups.

The result: Labor’s share of income fell for each individual firm but barely budged for the industry as a whole. That’s because higher markups make capital goods more expensive, helping labor-intensive firms win market share from capital-intensive firms.

The model’s exact predictions may change based on parameter choices. Even so, the finding “presents a challenge for theories of the decline in the labor share that are based on rising markups in the United States,” Kaymak and Schott write.

Read the Economic Commentary: Do Higher Markups Lower Labor’s Share of Income?