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


  • Sekyu Choi
  • José-Víctor Rios-Rull


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. 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.
    2. Mangin, Sephorah & Sedláček, Petr, 2018. "Unemployment and the labor share," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 41-59.
    3. 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.
    4. 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.
    5. 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.
    6. Javier Andrés & José E. Boscá & Javier Ferri & Cristina Fuentes-Albero, 2018. "Households' balance sheets and the effect of fiscal policy," Working Papers 1831, Banco de España.
    7. 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.
    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. 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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