Innovation, market power and the labour share: evidence from OECD industries

Two issues remain overlooked in the growing research effort on the relationship between innovation, market power and labour share. One is the simultaneous determination of innovation, market power and labour share as endogenous outcomes. The second is the role of market power as a confounder that affects both innovation and labour share at the same time. We address both issues by adopting a simultaneous equations approach and using EU-KLEMS data from 1995-2019 on 31 OECD industries and 12 countries. Our findings indicate that: (i) innovation always increases with markups, particularly when the latter increase from a high initial level; (ii) market power always increase with innovation, particularly when the latter is extended to include marketing and organisational innovation; (iii) the effects of market power on labour share are always more adverse than the innovation effects; and (iv) the combined effect of labour-market institutions and human capital is not sufficient to reverse the adverse effect of market power on labour share. Our findings indicates that the major driver of the decline in labour share is not technological innovation per se, but the extent of market power that allows innovators to extract innovation rents