Labor income share and imperfectly competitive product market

Abstract

This study examines the long-run determinants of the income distribution between capital and labor in the Korean market, a leading emerging market. We develop a model of a special type of oligopolistic market, controlled by a group of dominant firms, and a general oligopolistic market, with heterogeneously sized firms. This model provides empirically testable implications related to the long-run determinants of the income distribution. Using two measures of the degree of market concentration, the k-firm concentration ratio (CRk) and the Hirschman–Herfindahl index (HHI), we find a negative association between these concentration measures (CRk and HHI) and the labor income share. In addition, analyzing a unique dataset of manufacturing firms based on five- and three-digit Korean Standard Industry Classifications from 2000 to 2011, we find a significantly negative relationship between the labor income share and the market concentration, which is consistent with the implications of the model. Overall, our results suggest that building a more competitive product market environment could alleviate national income inequality.