Unemployment and the Labor Share

How do labor market conditions such as the unemployment rate influence the labor share? To answer this question, I develop a search-theoretic model of the labor market that generates a simple relationship between unemployment, workers' reservation wage, and the labor share. I derive expressions for the dynamic evolution of factor shares and present some comparative statics results regarding factor shares in the steady state equilibrium. I simulate the model and compare its predictions for factor shares to the U.S. data from 1951-2012. The results suggest that labor market conditions – specifically, unemployment fluctuations and changes in workers' reservation wage – can account for much of the variation in the U.S. labor share at an annual frequency during this period.