Effects of innovation and markups on employment and labour share in OECD industries

Abstract

This paper takes issue with what I describe as a single focus on either innovation or market power as potential determinants of employment or labour share. Drawing on a constant elasticity of substitution (CES) production function and EU- KLEMS data on OECD industries, I demonstrate that the unifocal approach is not justified theoretically or empirically. I report that: (i) employment and labour share depends on both innovation and market power; (ii) market power's direct effects on both outcomes are always negative and large; (iii) innovation's direct effects are small and depend on the elasticity of substitution between capital and labour; and (iv) innovation and market power have substitute interactive effects that exacerbate the fall in employment or labour share. I conclude that the main driver of the decline in labour share and/or employment is not technological innovation as such but the level of rents that innovating firms are able to extract.