Kyoto Workshop on Economics and Procurement

Abstract: We study the mechanism behind the decline in the labor share using highly detailed plant-level data on the cement industry in Japan. Using information on the production technology in place at each plant, we find that most of the labor share decline can be explained by new technology diffusion (introduction of “New Suspension Preheater kiln”). The labor share stays constant, or even slightly increases, over time within plants of the same technology, whereas the aggregate labor share declines as production shifts to plants with a new and more capital-intensive technology. We also find that the information on plant-level technology is key to rejecting other potential hypotheses and that we would reach a qualitatively different conclusion without this information. To show this, we examine, with and without technology information, two alternative hypotheses; (i) the decline in labor share is associated with an increase in markups and (ii) firms exercise monopsony power in the labor market. We reject these two hypotheses with technology information but may not without it.