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A Theory of Factor Shares

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  • Sephorah Mangin

Abstract

This paper presents a theory of how factor income shares are determined in an environment with labor market frictions and heterogeneous firms. I assume neither a specific aggregate production function nor competitive factor markets. Instead, I first develop microfoundations for an aggregate production function that incorporates a frictional process of matching workers and firms. Wages are determined by Bertrand style competition between firms whose productivity levels are assumed to be Pareto-distributed. In the limiting case where the unemployment rate goes to zero, the aggregate production function is Cobb-Douglas and factor shares are constant. In general, however, the behavior of factor shares is driven by labor market conditions such as unemployment and workers' reservation wage. I simulate the model and examine its predictions for factor shares in the U.S. during the period 1951-2010. The theory can explain much of the variation in factor shares from 1951 to 2003 but the sharp fall in labor's share in around 2004-2005 remains puzzling.

Suggested Citation

  • Sephorah Mangin, 2014. "A Theory of Factor Shares," Monash Economics Working Papers 19-14, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2014-19
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2014/1914theorymangin.pdf
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    References listed on IDEAS

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    Cited by:

    1. Basov, Suren & King, Ian & Uren, Lawrence, 2014. "Worker heterogeneity, the job-finding rate, and technical change," European Economic Review, Elsevier, vol. 70(C), pages 159-177.

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    More about this item

    Keywords

    Labor share; factor shares; aggregate production function; matching; unemployment; reservation wage; Cobb-Douglas; Pareto distribution; labor market frictions;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • 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
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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