Declining Allocative Efficiency, Falling Labour Shares, and Corporate Lobbying in European Manufacturing

Does lobbying result in reduced allocative efficiency and declines in consumer welfare? This paper examines key predictions of recent models This paper analyses firm-level data on European manufacturers and documents substantial variations across countries and industries in the extent to which economic activity moves towards higher productivity and lower labour share firms. While a general negative relationship between reallocation driven declining labour shares and productivity growth is documented, the evidence suggests that this effect is not due to industries with higher positive allocative efficiency growth also experiencing steeper declines in the labour share, but rather industries with less negative allocative efficiency growth experiencing smaller shifts towards low labour share firms. High relative lobbying intensity in an industry is shown to be a predictor of the coexistence of declining allocative efficiency and movements toward low labour share and high markup firms. Lobbying intensity is shown to work by limiting potential reallocation towards more productive firms rather than promoting reallocation towards higher markup-low labour share firms. These effects are shown to be greater for industries with higher concentration growth providing further evidence that lobbying activity is related to rent-seeking activities by large firms.