Non-Neutral Technology, Firm Heterogeneity, and Labor Demand

Abstract

In firm-level panel data, labor share exhibits large cross-sectional differences and a declining trend over time. This study examines the role of non-Hicks neutral technology differences across firms and over time in explaining these patterns. The non-Hicks neutral technology allows for differential factor-augmenting efficiencies for capital, labor, and material, and it has direct implications on labor shares. Estimated using firm-level production data and variation in input prices, evidence from the Chinese steel industry affirms the large heterogeneity of the non-Hicks neutral technology across firms, and its change over time is also highly non-Hicks neutral toward saving labor. The non-Hicks neutral technology explains over 50 percent of the 5.01-percentage points decline in labor share in the sample period, mainly due to the evolution of heterogeneous non-Hicks neutral technology and the resulting reallocation effect.