Linking the labour share of income to market imperfections: Microeconomic evidence from Italy

In the last 15 years or so, the Italian labour share of income has not displayed a clear pattern; this is partly due to the fact that different organizations compute it in different ways, making it difficult to draw a clear picture of this important labour indicator. Additionally, microeconomic evidence on product market power is still limited. In this study, we aim to shed light on the recent dynamics of the labour share in Italy and to better understand how such dynamics relate to the changes in market imperfections. Using firm-level data on a large sample of manufacturing firms for the years 2010-2018, we show that the observed trend in the revenue-based labour share, which is more reassuring than the trend in the valueadded labour share, is associated with a muted increase in the markups which, however, is more than offset by the rise in the parameter of labour market power. Also, variations in the labour share are driven by within-firm variations and are mostly explained by the wage share component. Finally, some interregional disparities emerge.