Matching labor’s share in a search and matching model

Claire A. Reicher ()
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Claire A. Reicher: Kiel Institute for the World Economy

Empirical Economics, 2016, vol. 50, issue 4, No 4, 1229-1254

Abstract: Abstract Labor’s share of income varies over the business cycle, and different theories of nominal rigidities predict different behaviors for labor’s share. Based on evidence from a VAR for the USA, labor’s share falls sharply after a positive productivity shock and does not necessarily “overshoot” its trend; labor’s share rises after a contractionary monetary policy shock; and labor’s share falls gradually after a positive shock to the unemployment rate. A search and matching model with sticky nominal wages but flexible prices can match all three facts. In contrast, a model with flexible nominal wages and flexible prices does not match the first two facts, and a model with flexible nominal wages but sticky prices does not match the second fact. Furthermore, it is difficult to distinguish between a model where the wages of new hires are sticky from one in which they are flexible based purely on macro data.

Keywords: Sticky wages; Sticky prices; Labor’s share; Staggered Nash bargaining; Search and matching (search for similar items in EconPapers)
JEL-codes: E24 E25 J23 J31 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s00181-015-0985-0

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