First, a bit of context. Krugman explains what we’d expect to see in a world in which rising markups are causing lower labor shares.
But who gains the income diverted from labor? Not capital — not really. Instead, it’s monopoly rents. In fact, the rental rate on capital — the amount someone who is trying to lease the use of capital to one of those monopolists receives — actually falls, by the same proportion as the real wage rate.
Loukas Karabarbounis and Brent Neiman have a new version of their paper on declining labor shares (which I’ve posted about previously) that derives these relationships explicitly and provides evidence and some calibrations on markups and labor shares. They find that markups play a role in declining labor share but put more emphasis on declining global investment prices. However, their expressions and evidence are informative and relevant for thinking about Krugman’s point above.
The share going to labor, capital, and firm owners mechanically sums to one. Higher markups mean a larger share for firm owners, leaving less for labor and capital. Equations 11-13 of their paper show this explicitly (note: mu is the markup and is a simple function of the elasticity of substitution between input varieties).
Figure 9 of Karabarbounis and Neiman shows how labor and capital shares have changed for a number of countries.
It’s a bit hard to see but many large countries, including the US, appear to be fairly close to the 45 degree line with both lower labor and capital shares, which is roughly consistent with the growing importance of markups. The datapoint for the US, which is near the origin in the bottom left quadrant, shows that a larger share is going to firm owners and less is going to both capital and labor. However, as shown by the best fit line, labor has lost more than capital on average (although it’s not clear if this is weighted by country GDP, which I think it should be for our purposes) which is consistent with their relative price of investment story. Both are likely true and my read of figure 9 is that for many countries, particularly those clustered in the bottom left quadrant around the 45 degree line, the data seem to be consistent with the idea that markups may have increased in a non-trivial way.
Finally, table 4 shows what a decline in the relative price of investment (cols 1 and 2), markups (cols 3 and 4), and both (cols 5 and 6) mean for macro aggregates and social welfare. The main point is that the welfare and output implications are much less favorable if markups are more of the story (relative to a combination of markups and declining investment prices or just investment price declines alone). You can see this by noting that output (viii) and a welfare equivalent consumption (xii) are much lower in the two markup columns 3 and 4. Note that the first (ie col 3) shows calibrations from Cobb Douglas production (in which expenditure shares on capital and labor are constant) and the second shows CES (in which firms can substitute factor shares more flexibly when prices change).