Labor share and market power in European firms

Silva, Jose I. and Okabe, Tomohito and Urzay, Sergi (2025): Labor share and market power in European firms.

Abstract

This study examines the relationship between firms’ market power, captured by product markups and labor markdowns, and the labor share within European firms. Using firm-level data from the CompNet database, we develop a microeconomic framework linking the labor share to firms’ market power. Empirical results show that labor markdowns reduce the labor share, while product markups have a hump-shaped effect on it. Specifically, moderate increases in product markups initially lead to a rise in the labor share. However, as markups reach higher levels, firms with significant pricing power increasingly exercise monopsony power over their workers, amplifying markdowns and suppressing labor costs. Additionally, the analysis uncovers substantial cross-country heterogeneity in the relationship between markups, markdowns, and the labor share.

• Item Type: MPRA Paper
• Language: English
• Keywords: product markup, labor markdown, firms’ labor share.
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; D - Microeconomics > D2 - Production and Organizations > D22 - Firm Behavior: Empirical Analysis; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L12 - Monopoly ; Monopolization Strategies

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