Firm Entry, Endogenous Markups and the Dynamics of the Labor Share of Income

28 Pages Posted: 18 Jan 2013

See all articles by Andrea Colciago

Andrea Colciago

De Nederlandsche Bank - Research Department; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Lorenza Rossi

University of Pavia - Department of Economics and Management

Date Written: January 15, 2013

Abstract

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

Colciago, Andrea and Rossi, Lorenza, Firm Entry, Endogenous Markups and the Dynamics of the Labor Share of Income (January 15, 2013). De Nederlandsche Bank Working Paper No. 367, Available at SSRN: https://ssrn.com/abstract=2202191 or http://dx.doi.org/10.2139/ssrn.2202191

Andrea Colciago (Contact Author)

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Lorenza Rossi

University of Pavia - Department of Economics and Management ( email )

via san Felice, 5
27100 Pavia, 27100
Italy

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