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A Unified Production and Matching Function: Implications for Factor Shares

  • Sephorah Mangin

    (Becker-Friedman Institute, University of Chicago)

This paper develops microfoundations for a unified aggregate production function. Labor market frictions are naturally built into the aggregate production function because matching and production are two aspects of a single process. Entrepreneurs with heterogeneous productivity levels hire capital and compete for workers. If no entrepreneurs approach a given worker he is unemployed, otherwise the entrepreneur with the highest productivity hires the worker. The model provides new insights into the behavior of factor shares. If the entrepreneurs' productivity distribution is Pareto, the aggregate production function is Cobb-Douglas only in the limit as frictional unemployment disappears. In this limiting case, factors are paid their marginal product and factor shares are constant. Outside this limit, factor shares are not generally constant, enabling us to examine their behavior. A key prediction of the model is that labor's share is counter-cyclical provided that workers' outside option is sufficiently high.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 500.

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Date of creation: 2012
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Handle: RePEc:red:sed012:500
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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