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Understanding the Dynamics of the Labor Share: the Role of non-Competitive Factor Prices

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  • Sekyu Choi
  • José-Víctor Rios-Rull

Abstract

In this paper we explore the dynamics of the aggregate labor share for the US economy. We explore the extent to which a family of real business cycles models, where wages are not set competitively (tailored to replicate cyclical facts about the labor market), is capable of generating the observed dynamics of labor share as described in Ríos-Rull and Santaeulalia-Llopis (2007). We build upon Merz (1995), Andolfatto (1996), Langot (1995), and Cheron and Langot (2004), among others, who analyze models where wages are determined via Nash bargaining, employment lags productivity, and labor share falls with productivity innovations. Although these models account for various business cycles properties, they fail in replicating the dynamic empirical response of the labor share to technological shocks; this occurs even after we change preferences and technology. However, changing the aggregate production function (from Cobb-Douglas to CES) delivers the best results, hinting that future research should be directed away from Cobb-Douglas technologies rather than from noncompetitive factor markets.

Suggested Citation

  • Sekyu Choi & José-Víctor Rios-Rull, 2009. "Understanding the Dynamics of the Labor Share: the Role of non-Competitive Factor Prices," Annals of Economics and Statistics, GENES, issue 95-96, pages 251-277.
    • Handle: RePEc:adr:anecst:y:2009:i:95-96:p:251-277
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    Cited by:

    1. Charpe, Matthieu & Kühn, Stefan, 2012. "Bargaining, Aggregate Demand and Employment," Dynare Working Papers 13, CEPREMAP.
    2. Javier Andrés & José E. Boscá & Javier Ferri, 2016. "Instruments, rules, and household debt: the effects of fiscal policy," Oxford Economic Papers, Oxford University Press, vol. 68(2), pages 419-443.
    3. Philippe Askenazy & Gilbert Cette & Paul Maarek, 2018. "Rent‐Sharing and Workers' Bargaining Power: An Empirical Cross‐Country/ Cross‐Industry Panel Analysis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(2), pages 563-596, April.
    4. Bellocchi, Alessandro & Travaglini, Giuseppe, 2023. "Can variable elasticity of substitution explain changes in labor shares?," Journal of Macroeconomics, Elsevier, vol. 76(C).
    5. Mangin, Sephorah & Sedláček, Petr, 2018. "Unemployment and the labor share," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 41-59.
    6. Jiwoon Kim, 2013. "Bargaining with Existing Workers, Over-hiring of Firms, and Labor Market Fluctuations," 2013 Meeting Papers 721, Society for Economic Dynamics.
    7. Alvarez-Cuadrado, Francisco & Long, Ngo Van & Poschke, Markus, 2018. "Capital-labor substitution, structural change and the labor income share," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 206-231.
    8. Mennuni, Alessandro, 2019. "The aggregate implications of changes in the labour force composition," European Economic Review, Elsevier, vol. 116(C), pages 83-106.
    9. Cantore, Cristiano & Ferroni, Filippo & León-Ledesma, Miguel A., 2017. "The dynamics of hours worked and technology," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 67-82.
    10. Christopher D. Blake, 2022. "A method for comparing compensation and productivity levels across US regions," SN Business & Economics, Springer, vol. 2(12), pages 1-30, December.
    11. Javier Andrés & José E. Boscá & Javier Ferri & Cristina Fuentes‐Albero, 2022. "Households' Balance Sheets and the Effect of Fiscal Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(4), pages 737-778, June.
    12. Serdar Kabaca, 2011. "Labor Share Fluctuations in Emerging Markets: The Role of the Cost of Borrowing," Koç University-TUSIAD Economic Research Forum Working Papers 1122, Koc University-TUSIAD Economic Research Forum.
    13. Makoto Nakajima, 2012. "Business Cycles In The Equilibrium Model Of Labor Market Search And Self‐Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 399-432, May.
    14. Sekyu Choi & José-Víctor Ríos-Rull, 2021. "Labour Share and Productivity Dynamics," The Economic Journal, Royal Economic Society, vol. 131(639), pages 2856-2886.
    15. Frydman, Carola & Papanikolaou, Dimitris, 2018. "In search of ideas: Technological innovation and executive pay inequality," Journal of Financial Economics, Elsevier, vol. 130(1), pages 1-24.
    16. J. Andrés & J. E. Boscá & J. Ferri, 2015. "Household Debt and Fiscal Multipliers," Economica, London School of Economics and Political Science, vol. 82, pages 1048-1081, December.
    17. Leonid Kogan & Dimitris Papanikolaou & Noah Stoffman, 2013. "Winners and Losers: Creative Destruction and the Stock Market," NBER Working Papers 18671, National Bureau of Economic Research, Inc.
    18. Tsu-ting Tim Lin & Charles L. Weise, 2019. "A New Keynesian Model with Robots: Implications for Business Cycles and Monetary Policy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 47(1), pages 81-101, March.
    19. Claire A. Reicher, 2016. "Matching labor’s share in a search and matching model," Empirical Economics, Springer, vol. 50(4), pages 1229-1254, June.

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