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  5. Not a Typical Firm: Capital–Labor Substitution and Firms’ Labor Shares

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Not a Typical Firm: Capital–Labor Substitution and Firms’ Labor Shares

  • Joachim Hubmer
  • Pascual Restrepo
American Economic Journal: Macroeconomics (Forthcoming)

Abstract

The US labor share has declined, especially in manufacturing and retail. Yet, the labor share of a typical firm in these sectors has risen. We introduce a model where firms incur fixed costs to automate tasks. A decline in the price of capital goods used for automation reproduces the observed patterns: large firms automate tasks, reducing the aggregate labor share, while the median firm continues to operate a labor-intensive technology. When calibrating the automation fixed costs to match the observed adoption heterogeneity, the model generates the aggregate and firm-level facts quantitatively in response to lower capital prices, especially in manufacturing.

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