Heterogeneous policy distortions and the labor share

I develop an extension of the neoclassical growth model in which firms are heterogeneous both in terms of labor share and productivity. In this model, distortions in the allocation of resources across firms can impact the labor share of national income. Using administrative firm-level data to calibrate the model, I show in particular that a removal of policies reducing the output price of more productive firms can generate a sizable decrease in the aggregate labor share (between 1 and 4 percentage points). My results suggest that the recent decline in the global labor share of income is both qualitatively and quantitatively consistent with an improvement in resource allocation across firms. (C) 2020 Elsevier Inc. All rights reserved.