Corporate Tax Cuts and the Decline of the Manufacturing Labor Share

No 1379, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We document a strong empirical connection between corporate taxation and the manufacturing labor share, both in the US and across OECD countries. Our estimates associate 30 percent to 60 percent of the observed decline in labor shares with the fall in corporate taxation. Using an equilibrium model of an industry where firms differ in their capital intensities, we show that lower corporate tax rates reduce the labor share by raising the market share of capital-intensive firms. The tax elasticity of the labor share depends on the joint distribution of labor intensities and value added at the micro level. Given the empirical distribution in the US manufacturing sector, our quantitative analysis suggests that corporate tax cuts explain a significant part of the decline in the manufacturing labor share since the 1950s. The shift away from traditionally large, labor-intensive production units raised the concentration of market shares and reduced the concentration of employment.

Keywords: Labor share of income; Corporate taxation; Industry dynamics; Firm size distribution (search for similar items in EconPapers)
JEL-codes: E25 H32 L11 L60 (search for similar items in EconPapers)
Date: 2023-08-30
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Corporate Tax Cuts and the Decline in the Manufacturing Labor Share (2023)
Working Paper: Corporate tax cuts and the decline of the manufacturing labor share (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1379

DOI: 10.17016/IFDP.2023.1379

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