Non-Neutral Technology, Firm Heterogeneity, and Labor Demand
[Abstract] This paper examines the role of non-Hicks neutral technology in driving the declining trend and large variation in labor share across firms.
The analysis uses firm-level production data and variation in input prices to estimate the non-Hicks neutral technology, which allows for factor-augmenting efficiencies for capital, labor, and material. Evidence from the Chinese steel industry shows large heterogeneity of 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 about two-thirds of the cross-sectional variation, and one-half of the within-firm variation of labor share in this industry. Counterfactual experiments shows that non-Hicks neutral technology explains 76 percent of the 5.01 percentage point decline in labor share. The labor demand in 2007 would have been 114 percent higher than that observed in the data to produce the same output if technology were Hicks neutral, given fixed input prices. The impact is mainly due to the labor-saving non-Hicks neutral technology change over time and the resulting reallocation of production across firms.