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 of the labor share. 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 an operating margin built on the Compustat sample of Anderson et al. (2025, ARW), and markdowns from marginal-product residuals. The labor share, output, the real wage, and the real rate of return on capital remain untargeted moments. Three findings follow. First, rising wage markdowns alone reproduce the labor share decline; the ARW level is by construction an upper bound on the model-consistent markup — its cost base excludes the return to capital that the model counts in marginal cost — so combining the markdown with the full ARW markup overshoots the data, and the joint fit is closest, among the markup levels examined, at roughly half that 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 for the level of real wages — without it, the real-wage index in 2024 reaches only about half its full-model level; distribution and growth are mechanically separable in this calibration. Third, the implied markdown path translates into 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.
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@unpublished{gouveiamendes2026markups,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}
}