A Micro-Distributional Theory of the Aggregate Labor Share:Firm Size Distribution and Technological Heterogeneity

The global decline in the labor income share has challenged the classical Kaldor facts; however, the macroeconomic aggregation mechanism – namely, how aggregate factor shares emerge from firm-level heterogeneity – remains underexplored. This paper bridges this gap by constructing a theoretical framework that links firm size distribution to aggregate factor shares. We extend Houthakker’s aggregation theory and formalize the \textit{weighting effect}: when large firms are systematically more capital-intensive than small firms, a shift in market structure toward larger firms mechanically reduces the aggregate labor share. Using comprehensive firm-level data from Chinese manufacturing (2001–2015), we empirically validate this mechanism. First, we estimate production function parameters and confirm that capital elasticity significantly exceeds labor elasticity, implying a negative relationship between firm size and labor share. Second, we find that the negative effect of firm size on labor share is significant only in industries with high technological heterogeneity. Counterfactual decomposition reveals that the shift in the size distribution toward superstar firms'' during 2001--2015 constitutes the primary driver of the labor share decline. Our findings provide a technical micro-foundation for the superstar firm’’ hypothesis and highlight the distributional consequences of ``winner-take-all’’ market structures.

💡 Research Summary

The paper tackles the puzzling decline in the labor‑share of income that has been observed across advanced economies over the past three decades. While most of the existing literature attributes this trend to macro‑level forces such as biased technical change, globalization, or automation, it largely ignores the role of firm‑level heterogeneity. The authors therefore develop a micro‑foundation that links the distribution of firm sizes directly to the aggregate labor share, providing a formal theoretical basis for the “super‑star firm” hypothesis.

The theoretical model builds on two empirically supported assumptions. First, firm output follows a truncated Pareto distribution with shape parameter ξ (the Pareto exponent) and bounded support