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?
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
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