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

DNB Working Papers
Date 15 January 2013
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 easily reconciled 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. While 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 for the dynamics of the labor share of income.
Keywords: Labor Share Overshooting, Endogenous Market Structures, Search and Matching Frictions.
JEL classification: E24, E32, L11.