Market power and income distribution: lessons from hybrid industrial-labour economics

Over the past thirty years, the income gap between capital and labour has widened, a shift accompanied by an increase in dominant firms' market power. To understand the underlying causes, our study integrates imperfect competition in both product and labour markets, revealing how different labour market rent sharing mechanisms impact income distribution. We show that firms' gross profit margin serves as a consistent measure of overall market power and a crucial determinant of income inequity. We also develop a novel empirical method to estimate production function, markup and markdown powers, which we apply to a panel of UK manufacturing firms. Our findings demonstrate that the root cause of inequality in market power is the large disparity in firms' productivity, leading to both income inequity and inefficiency, not a trade-off between the two. Our research underscores the importance of addressing market power concentration to promote equitable and efficient economic growth