TY - JOUR

T1 - Firm Dynamics, Endogenous Markups, and the Labor Share of Income

AU - Colciago, A.

AU - Rossi, L.

PY - 2015/9/30

Y1 - 2015/9/30

N2 - 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.

AB - 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.

KW - Endogenous Market Structures

KW - Labor Share Overshooting

KW - Search and Matching Frictions

U2 - 10.1017/S1365100513000849

DO - 10.1017/S1365100513000849

M3 - Journal article

VL - 19

SP - 1309

EP - 1331

JO - Macroeconomic Dynamics

JF - Macroeconomic Dynamics

SN - 1365-1005

IS - 6

ER -