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

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>30/09/2015
<mark>Journal</mark>Macroeconomic Dynamics
Issue number6
Number of pages23
Pages (from-to)1309-1331
Publication StatusPublished
Early online date11/11/14
<mark>Original language</mark>English


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. © 2014 Cambridge University Press.