Firm Entry, Endogenous Markups and the Dynamics of the Labor Share of Income
28 Pages Posted: 18 Jan 2013
Date Written: January 15, 2013
Recent U.S. evidence suggests that the response of labor share to a productivity shock is characterized by countercyclicality and overshooting. These findings cannot be easily reconciled with existing business cycle models. We extend the Diamond-Mortensen-Pissarides model of search in the labor market by considering strategic interactions among an endogenous number of producers, which leads to countercyclical price markups. While Nash bargaining delivers a countercyclical labor share, we show that countercyclical markups are fundamental to address the overshooting. On the contrary, we find that real wage rigidity does not seem to play a crucial role for the dynamics of the labor share of income.
Keywords: Labor Share Overshooting, Endogenous Market Structures, Search and Matching Frictions
JEL Classification: E24, E32, L11
Suggested Citation: Suggested Citation