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

  • Andrea Colciago
  • Lorenza Rossi

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.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 367.

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Date of creation: Jan 2013
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Handle: RePEc:dnb:dnbwpp:367
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Web page: http://www.dnb.nl/en/

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  1. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
  2. Federico Etro & Andrea Colciago, 2007. "Endogenous Market Structure and the Business Cycle," Working Papers 126, University of Milano-Bicocca, Department of Economics, revised Nov 2007.
  3. Olivier Blanchard & Jordi Gali, 2005. "Real Wage Rigidities and the New Keynesian Model," NBER Working Papers 11806, National Bureau of Economic Research, Inc.
  4. Thomas F. Cooley & Vincenzo Quadrini, 1999. "Financial Markets and Firm Dynamics," Working Papers 99-14, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Enchuan Shao & Pedro Silos, 2011. "Accounting for the cyclical dynamics of income shares," Working Paper 2011-09, Federal Reserve Bank of Atlanta.
  6. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  7. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers.
  8. Guido Ascari & Lorenza Rossi, 2010. "Real Wage Rigidities and Disinflation Dynamics: Calvo vs. Rotemberg Pricing," Quaderni di Dipartimento 116, University of Pavia, Department of Economics and Quantitative Methods.
  9. Gomme, Paul & Greenwood, Jeremy, 1995. "On the cyclical allocation of risk," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 91-124.
  10. Colciago , Andrea & Rossi, Lorenza, 2011. "Endogenous market structures and labour market dynamics," Research Discussion Papers 12/2011, Bank of Finland.
  11. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  12. John C. Haltiwanger & Ron S. Jarmin & Javier Miranda, 2010. "Who Creates Jobs? Small vs. Large vs. Young," NBER Working Papers 16300, National Bureau of Economic Research, Inc.
  13. Andrea Colciago & Lorenza Rossi, 2011. "Endogenous Market Structures and Labor Market Dynamics (New version)," Quaderni di Dipartimento 155, University of Pavia, Department of Economics and Quantitative Methods.
  14. Ester Faia & Lorenza Rossi, 2009. "Unions Power, Collective Bargaining and Optimal Monetary Policy," Kiel Working Papers 1490, Kiel Institute for the World Economy.
  15. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  16. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
  17. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  18. Garey Ramey & Wouter J. den Haan & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, vol. 90(3), pages 482-498, June.
  19. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
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