Journal Article

Matching labor’s share in a search and matching model

Empirical Economics

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.


Claire Boeing-Reicher