Competition Policy and the Decline of the Labour Share

We investigate whether there is a link between competition policy and the decline in ‎the labour share observed in many industrialised countries. By using a panel of 22 ‎industries in 12 OECD economies, over the period 1995-2005, we find a positive link ‎between an effective competition policy and the labour share trend. Our findings ‎support the hypothesis that a lax or inactive competition policy has contributed to the ‎decline of the labour share across many developed countries. The main mechanism ‎through which competition policy affects the labour share is through its ability to ‎constrain mark-ups: competition policy is negatively correlated to mark-ups, while ‎mark-ups are negatively correlated to labour share. The results suggest that ‎competition policy could be particularly important in mitigating the decline of the ‎labour share in settings characterised by low levels of labour protection and labour ‎bargaining power. More broadly, by permitting higher mark-ups to be sustained in ‎some industries and jurisdictions, the results suggest that weak competition policy may ‎contribute to higher levels of economic inequality given that labour income is more ‎evenly distributed across households than capital income. ‎