Hostname: page-component-cd9895bd7-gvvz8 Total loading time: 0 Render date: 2024-12-23T17:35:18.206Z Has data issue: false hasContentIssue false
  • English
  • Français

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].
Get access Rights & Permissions [Opens in a new window]

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 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Andolfatto, David (1996) Business cycles and labor market search. American Economic Review 86, 112–132.Google Scholar
Ascari, Guido and Rossi, Lorenza (2011) Real wage rigidities and disinflation dynamics: Calvo vs. Rotemberg pricing. Economics Letters 110 (2), 126–131.CrossRefGoogle Scholar
Bilbiie, Florin, Ghironi, Fabio, and Melitz, Mark (2012) Endogenous entry, product variety, and business cycles. Journal of Political Economy 120, 304–345.CrossRefGoogle Scholar
Bils, Mark (1987) The cyclical behavior of marginal cost and price. American Economic Review 77, 838–855.Google Scholar
Blanchard, Olivier and Galí, Jordi (2007) Real wage rigidities and the New Keynesian model. Journal of Money, Credit and Banking 39 (1), 35–65.CrossRefGoogle Scholar
Blanchard, Olivier and Galì, Jordi (2010) Labor market frictions and monetary policy: A New Keynesian model with unemployment. American Economic Journal: Macroeconomics 2, 1–30.Google Scholar
Blanchard, Olivier and Giavazzi, Francesco (2003) Macroeconomic effects of regulation and deregulation in goods and labor markets. Quarterly Journal of Economics 118 (3), 879–907.CrossRefGoogle Scholar
Bresnahan, Timothy and Reiss, Peter (1987) Do entry conditions vary across markets? Brookings Papers on Economic Activity 3, 833–881.CrossRefGoogle Scholar
Campbell, John and Hopenhayn, Hugo (2005) Market size matters. Journal of Industrial Economics 53, 1–25.CrossRefGoogle Scholar
Choi, Sekyu and Ríos-Rull, José-Víctor (2009) Understanding the dynamics of labor share: The role of noncompetitive factor prices. Annales d'Economie et Statistique 95/96, 251–278.CrossRefGoogle Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1–45.CrossRefGoogle Scholar
Christoffel, Kai and Linzert, Tobias (2010) The role of real wage rigidity and labor market frictions for inflation persistence. Journal of Money, Credit and Banking 42 (7), 1435–1446.CrossRefGoogle Scholar
Colciago, Andrea and Etro, Federico (2010) Endogenous market structures and the business Cycle. Economic Journal 120, 1201–1233.Google Scholar
Colciago, Andrea and Rossi, Lorenza (2011) Endogenous Market Structures and Labor Market Dynamics. Working paper 139, Dipartimento di Economia Politica e Metodi Quantitativi, Università degli Studi di Pavia. Available at https://sites.google.com/site/andreacolciago.Google Scholar
Cooley, T. and Quadrini, Vincenzo (2001) Financial markets and firm dynamics. American Economic Review 91 (5), 1286–1310.CrossRefGoogle Scholar
Davis, Steven J., Haltiwanger, John C., and Schuh, Scott (1996) Job Creation and Job Destruction. Cambridge, MA: MIT Press.Google Scholar
Den Haan, Garey Ramey Wouters, and Watson, Joel (2000) Job destruction and the propagation of shocks. American Economic Review 90, 482–498.CrossRefGoogle Scholar
Faia, Ester and Rossi, Lorenza (2013) Unions power, collective bargaining and optimal monetary policy. Economic Inquiry 51, 408–427.CrossRefGoogle Scholar
Galì, Jordi, Gertler, Mark, and López-Salido, David (2007) Markups, gaps, and the welfare costs of business fluctuations. Review of Economics and Statistics 89, 44–59.CrossRefGoogle Scholar
Gertler, Mark and Trigari, Antonella (2009) Unemployment fluctuations with staggered Nash wage bargaining. Journal of Political Economy 117 (1), 38–86.CrossRefGoogle Scholar
Hall, Robert E. (2005a) Job loss, job finding, and unemployment in the U.S. economy over the past fifty years. NBER Macroeconomics Annual 20, 101–137.CrossRefGoogle Scholar
Hall, Robert E. (2005b) Employment fluctuations with equilibrium wage stickiness. American Economic Review 95 (1), 50–65.CrossRefGoogle Scholar
Haltiwanger, John C., Jarmin, Ron S., and Miranda, Javier (2010) Who Creates Jobs? Small vs. Large vs. Young. NBER working paper 16300.Google Scholar
Hornstein, Andreas (1993) Monopolistic competition, increasing returns to scale, and the importance of productivity shocks. Journal of Monetary Economics 31 (3), 299–316.CrossRefGoogle Scholar
Krause, Mark U. and Lubik, Thomas A. (2007) The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions. Journal of Monetary Economics 54, 706–727.CrossRefGoogle Scholar
Manuszak, Mark (2002) Endogenous market structure and competition in the 19th century American brewing industry. International Journal of Industrial Organization 20, 673–932.CrossRefGoogle Scholar
Manuszak, Mark and Moul, Charles (2008) Prices and endogenous market structure in office supply superstores. Journal of Industrial Economics 56, 94–112.CrossRefGoogle Scholar
Merz, Monica (1995) Search in the labor market and the real business cycle. Journal of Monetary Economics 36, 269–300.CrossRefGoogle Scholar
Merz, Monica and Yashiv, Eran (2007) Labor and the market value of the firm. American Economic Review 97, 1419–1431.CrossRefGoogle Scholar
Reicher, Christopher (2011) Matching Labor's Share in a Search and Matching Model. Kiel working paper 1733.Google Scholar
Ríos-Rull, José-Víctor, and Santaeulàlia-Llopis, Raul (2010) Redistributive shocks and productivity shocks. Journal of Monetary Economics 57 (8), 931–948.CrossRefGoogle Scholar
Rotemberg, Julio and Woodford, Mark (2000) The cyclical behavior of prices and costs. In Taylor, J. B. and Woodford, M. (eds.), Handbook of Macroeconomics, Vol. 1, pp. 1051–1135. Amsterdam: Elsevier.Google Scholar
Shao, Enchuan and Silos, Pedro (2011) Accounting for the Cyclical Dynamics of Income Shares. Atlanta Fed working paper 2011-9.CrossRefGoogle Scholar