Osaka Workshop on Economics of Institutions and Organization (#152)

This paper challenges the consensus in the literature that labor supply factors play no role in understanding the labor share of income. We develop a simple dynamic general equilibrium model with search-matching frictions in the labor market, endogenous work hours, and capital. An increase in productivity reduces work hours through the income effect without reducing output. This reduces the labor share as income grows. Our quantitative analysis shows that productivity improvement explains both the downward trend in the U.S. labor share and the decline in work hours. Abstract：Noritaka Kudoh