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FIRM DYNAMICS, ENDOGENOUS MARKUPS, AND THE LABOR SHARE OF INCOME

Published online by Cambridge University Press:  11 November 2014

Andrea Colciago  and
Lorenza Rossi
Andrea Colciago*
Affiliation:
De Nederlandsche Bank and University of Milan Bicocca
Lorenza Rossi
Affiliation:
University of Pavia
*
Address correspondence to: Andrea Colciago, De Nederlandsche Bank, Research Department, Postbus 98, 1000AB Amsterdam, Westeinde 1,1017 ZN, the Netherlands; email: [email protected].
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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 reconciled easily 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. Although 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 in the dynamics of the labor share of income.

Keywords

Labor Share OvershootingEndogenous Market StructuresSearch and Matching Frictions
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Special Issue 6: Growth, Optimal Fiscal and Monetary Policy, and Financial Frictions , September 2015 , pp. 1309 - 1331
Copyright
Copyright © Cambridge University Press 2014 

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