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Golden Rules for Wages

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  • Andrew T. Young
  • Hernando Zuleta

Abstract

We consider a decentralized version of the neoclassical growth model where labor share is chosen by workers to maximize their long run (permanent) wages. In this framework, if the labor share increases relative to the competitive share, workers capture a larger share of a smaller total income in the steady-state. This is because the incentives to invest are lower and the steady-state capital to labor ratio is lower. We find that the “Golden Rule†labor share is equal to the elasticity of output with respect to labor. This is precisely what would obtain under the assumption of competitive factor markets. We also consider the model with two classes of workers: organized and unorganized. In this case, organized labor may choose a higher than competitive share and the difference is economically significant for plausible parameter values. Furthermore, relative to the Cobb-Douglas case, organized labor chooses a higher share for the empirically relevant case of an elasticity of substitution less than unity. We also analyze versions of the model with endogenous skill acquisition and capitalists with bargaining power.

Suggested Citation

  • Andrew T. Young & Hernando Zuleta, 2013. "Golden Rules for Wages," Documentos CEDE 011887, Universidad de los Andes – Facultad de Economía – CEDE.
  • Handle: RePEc:col:000089:011887
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    1. Golden Rules for Wages
      by Christian Zimmermann in NEP-DGE blog on 2014-07-31 18:01:48

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    More about this item

    Keywords

    labor share; capital share; factor shares; trade unions; bargaining power; organized labor; political economy;
    All these keywords.

    JEL classification:

    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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