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Labor Share Dynamics and Factor Complementarity

Author

Listed:
  • Chang Juin-Jen

    (Institute of Economics, Academia Sinica. 128 Academia Road, Section 2, Nankang, Taipei 115, Taiwan, ROC)

  • Kuo Chun-Hung

    (Department of Economics, National Tsing Hua University. No. 101, Section 2, Kuang-Fu Road, Hsinchu 300, Taiwan, ROC)

Abstract

This paper investigates the mechanism behind the cyclical movements in the labor income share. We build a dynamic stochastic general equilibrium model with search and matching frictions to examine the counter-cyclicality and overshooting of the labor income share, following a technology innovation. This model features (i) a time-varying output elasticity of labor, generated from the capital–labor complementarity under a constant-elasticity-of-substitution production function, and (ii) an endogenous markup variation, generated from wage/price rigidity. Through the output elasticity and markup channels, the capital–labor complementarity interacts with wage rigidity, which allows us to produce a satisfactory matching of the amplitude of the labor share overshooting observed in the data. The amplitude of the labor share overshooting is more significant when wages (prices) are more (less) sticky, and when the government’s interest rate rule is more (less) responsive to the deviation in the inflation (output) target.

Suggested Citation

  • Chang Juin-Jen & Kuo Chun-Hung, 2023. "Labor Share Dynamics and Factor Complementarity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 23(1), pages 27-55, January.
    • Handle: RePEc:bpj:bejmac:v:23:y:2023:i:1:p:27-55:n:2
    DOI: 10.1515/bejm-2021-0101
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    More about this item

    Keywords

    labor income share; complementarity between labor and capital; endogenous markup; rigidity in wages and prices;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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