The decline of the labor share in India
Abstract: The aggregate labor share of income in India declined by seven percentage points in thirty years since the 1980s. While the decline in the labor share of income has been observed globally, the decline is particularly sharp in India. I show that changes in the within-industry labor shares alone can explain half of the overall decline, and structural change is a key contributor in explaining the other half of this decline. Motivated by this, I construct a multi-sector general equilibrium model to investigate how structural change interacts with two leading factors of the decline - a fall in the relative price of investment goods (RPI) and an increase in markups. To quantify the relative importance, I first estimate markups in India using firm-level data from the Annual Survey of Industries and measure the decline in RPI using the Penn World Tables. I calibrate the model to match KLEMS. data from the Reserve Bank of India (RBI) and run counterfactual exercises. I find that the decline in RPI is more consistent with the co-movement of industry labor shares and value-added shares observed in the data.
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