Not a Typical Firm: Capital–Labor Substitution and Firms' Labor Shares
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. (JEL D21, D33, E25, L60, O32)
Fields of Study & Subjects
Economic Growth and Productivity
Firm Innovation and Growth
Economic Policies and Impacts
Publication details
- Journal / source
- American Economic Journal Macroeconomics
- Publisher
- American Economic Association
- Volume
- 18
- Issue
- 2
- Pages
- 34–71
- Publication date
- 30 March 2026
- Language
- EN