Golden Rules of Wages

31 Pages Posted: 24 Sep 2013 Last revised: 31 Oct 2013

See all articles by Andrew T. Young

Andrew T. Young

Texas Tech University - Rawls College of Business

Hernando Zuleta

Universidad de los Andes, Colombia

Multiple version iconThere are 2 versions of this paper

Date Written: October 2013

Abstract

We consider a neoclassical growth model where labor collectively chooses the labor share to maximize its steady-state wage rate. If the labor share increases relative to the competitive share, labor captures a larger share of a smaller total income. At a higher labor share the incentives to invest are lower and the steady-state capital to labor ratio is lower. We derive the golden rule of wages: set labor share equal to the elasticity of output with respect to labor. This is precisely the competitive outcome. We also consider the model with two types of labor: organized and unorganized. In this case, organized labor may choose a higher than competitive income share. Relative to the Cobb-Douglas case, when the elasticity of substitution is less than unity the chosen organized labor share is higher. We also analyze a version of the model that incorporates a tradeoff between collective bargaining opportunities and skill acquisition.

Keywords: labor share, capital share, factor shares, trade unions, bargaining power, organized labor, political economy

JEL Classification: O43, J30

Suggested Citation

Young, Andrew T. and Zuleta, Hernando, Golden Rules of Wages (October 2013). Documento CEDE No. 2013-42, Available at SSRN: https://ssrn.com/abstract=2329801 or http://dx.doi.org/10.2139/ssrn.2329801

Andrew T. Young

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

Hernando Zuleta (Contact Author)

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

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