Labor Market Power and Technological Change in U.S. Manufacturing

We estimate plant-level production functions with Census microdata to document rising labor market power in the US manufacturing sector: production workers were paid their marginal revenue product in 1972, but only half this amount by 2014. The aggregate labor wedge emerges because marginal-revenue-product growth accelerates, while wage growth remains stable. At the plant level, labor wedges negatively predict labor shares, consistent with the hypothesis that labor market power helps account for the decline of the US manufacturing labor share. Testing mega-/superstar firm hypotheses and existing macroeconomic models, we find mixed evidence that labor market power is related to labor market concentration. By comparison, labor market power is strongly correlated with direct measures of information and communication technologies and indirect measures of management and automation technologies. Our results underscore technological change as a key driver of labor market power through by influencing the effective marginal cost of labor.