Working Paper

Corporate Tax Cuts and the Decline of the Manufacturing Labor Share

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;

JEL Classification: E25; H32; L11; L60;

https://doi.org/10.17016/IFDP.2023.1379

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2023-08-30

Number: 1379