Productivity Dispersion, Between-Firm Competition, and the Labor Share

Résumé

I propose a tractable model of the labor share that emphasizes the interaction between labor market imperfections and productivity dispersion. I bring the model to the data using an administrative dataset covering the universe of firms in Canada. As in the data, most firms have a high labor share, yet the aggregate labor share is low due to the disproportionate effect of a small fraction of large, extremely productive “superstar firms”. I find that a rise in the dispersion of firm productivity leads to a decline of the aggregate labor share in favor of firm profit. The mechanism is that productivity dispersion effectively shields highproductivity firms from wage competition. Reduced-form evidence from cross-country and cross-industry data supports both the prediction and the mechanism. Through the lens of the model, rising productivity dispersion has caused the U.S. labor share to decline starting around 1990.