Markups, Markdowns, and the Labor Share
Job Market Paper Draft
Sole-authored · 2026
Abstract. The U.S. labor share of income has declined persistently since 1980. I develop a two-sector general equilibrium model that nests investment-embodied technological progress (IETP), product-market markups, and labor-market wage markdowns, and use it to decompose their joint contribution to the post-1980 decline. The calibration uses no income-share moments: capital-output elasticities are recovered from a within-industry panel regression, TFP growth rates from the long-run trends of the capital stock and the relative investment price, markups from the operating-margin series of Anderson et al. (2025, ARW), and markdowns from marginal-product residuals. The labor share, real wage, output, and capital stock remain as out-of-sample tests. Three findings follow. First, rising wage markdowns alone reproduce the labor-share decline; combining them with the ARW markup overshoots the data, identifying the ARW level as an upper bound on the model-consistent markup, with the best joint fit at roughly half its level. Second, IETP contributes essentially nothing to the labor-share trend but accounts for nearly all of the rise in the relative investment price and brings the wage index in 2024 from about half its full-model level to the value observed in the data —distribution and growth are mechanically separable in this calibration. Third, the implied markdown path translates to a halving of the firm-level labor-supply elasticity, from about 6.4 to 3.5; within the aggregation scheme, the consumption-sector markdown carries roughly three times the leverage of the investment-sector markdown on the aggregate labor share. The substantive conclusion is that the intensification —not necessarily the structural expansion— of employer market power in the consumption sector is the dominant force behind the post-1980 U.S. labor-share decline.
Paper and slides coming soon.
Keywords
Labor share · Markups · Wage markdowns · Monopsony · Investment-embodied technical change · Two-sector general equilibrium
Cite (BibTeX)
@unpublished{gouveiamendes2026markups,
author = {Gouveia-Mendes, Ricardo},
title = {Markups, Markdowns, and the Labor Share: A Two-Sector
General Equilibrium Decomposition},
year = {2026},
note = {Job Market Paper, ISCTE-IUL University Institute of Lisbon}
}