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The trend in labour income share: The role of technological change and imperfect labour markets

The non-constancy of factor shares is raising the attention of many researchers. We contribute to the literature by documenting an average drop of the labour share of 8 percentage points for eight European countries and the US between 1980 and 2007. Speculating on the type of production function, we investigate theoretically and empirically two driving forces: the decline of Information Communication Technology (ICT) investment price and the presence of frictions in the labour market. We find that cheaper ICT equipment is a promising channel to explain the decline of the labour share, given an elasticity of substitution with labour of about 1.17. Finally, by modelling this elasticity as a function of labour market institutions and worker groups, we find that it is strongly positively affected by a decline of routine occupations. An unconventional way to show the job polarization phenomenon.