Labor Share, Industry Concentration and Energy Prices: Evidence from Europe

Climate change policies are often met with resistance due to fears over the loss of competitiveness and employment. This paper studies the effect of energy prices, which are a proxy for a carbon tax, on the labor share of income and industry concentration. Using aggregated administrative data from 15 European countries and 56 sectors for the years 2000-2016, and applying a shift-share instrumental variable approach, we find that the energy price has a negative and quantitatively significant effect on the labor share. Exploring the potential mechanisms, we document strong evidence that the degree of substitution between energy and labor is lower than the substitution between energy and capital. Reallocation among firms, changes in aggregate markups or the value-added to output ratio induced by energy price shocks do not lead to sizable changes in the labor share. We find no robust evidence that energy prices affect industry concentration and markups. These results indicate sizable potential redistributional impacts of climate change policies, at least in the short-run, as the transitional costs differ across the primary factors.