Declining Labor Shares and Bargaining Power: An Institutional Explanation

28 Pages Posted: 12 Mar 2009 Last revised: 22 Apr 2009

See all articles by Benjamin Bental

Benjamin Bental

University of Haifa - Department of Economics

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: April 16, 2009

Abstract

We model the design of labor market institutions in an economy characterized by moral hazard and irreversible investment. In this setting the institutional design affects the bargaining power of labor. At the optimum, the allocation of bargaining power balances the aforementioned frictions. We examine the impact of improved monitoring and investigate the implication upon labor share, effort and investment. The model's predictions are consistent with recent decreasing labor shares and wages per effective labor units observed in most OECD countries. It is also consistent with rising labor productivity and declining ratio between effective labor and capital found in many of these countries.

Keywords: Institutions, moral hazard, irreversible investment, bargaining, labor share, productivity

JEL Classification: D02, D24

Suggested Citation

Bental, Benjamin and Demougin, Dominique, Declining Labor Shares and Bargaining Power: An Institutional Explanation (April 16, 2009). European Business School Research Paper No. 09-02, Available at SSRN: https://ssrn.com/abstract=1354774 or http://dx.doi.org/10.2139/ssrn.1354774

Benjamin Bental

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel

Dominique Demougin (Contact Author)

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics ( email )

International University Schloss Reichartshausen
Campus Wiesbaden, Soehnleinstrasse 8A
Wiesbaden, 65201
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Muenchen, 81679
Germany

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