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Over the business cycle, labor's share of output is negatively but weakly correlated with output, and it lags output by about four quarters. Profits' share is strongly pro-cyclical. It neither leads nor lags output, and its volatility is about five times that of output. Those assumptions relate to the structure of aggregate technology and the degree of competition in factor markets. Despite much evidence in favor of time-varying income shares, macroeconomics still lacks models that can account for their time series facts. This article constructs a model that can replicate those facts. We introduce costly entry of firms in a model with frictional labor markets and find a link between the ability of the model to replicate income shares' dynamics and the ability of the model to amplify and propagate shocks. That link is a weak correlation between the real interest rate and output, a fact in U.S. data but a feature that models of aggregate fluctuations have had difficulty achieving. (JEL E3, E25, J3, E24 ) [ABSTRACT FROM AUTHOR]

Examines the effect of profit sharing on unemployment in a simple model with an employment externality, overhead costs, and free entry. Reduction of equilibrium unemployment by mandated profit sharing in certain situations; Effect of lowering employment and compensation in general equilibrium.

Demonstrates how the small-scale introduction of share contracting reduces cyclical unemployment but lowers cyclical average profits compared to a fixed-wage regime. Basic nature of fixed-wage system; Maximization of the gross profits prior to profit-sharing; Residual shares in the unstable economy.

The paper examines the effects of profit sharing in an economy with decentralized wage bargaining. Profit sharing makes workers' income more sensitive to wage changes, and this leads to wage moderation. But economy-wide profit sharing may also improve workers' outside income opportunities, and this strengthens the union's hand in bargaining and tend to raise wages. It turns out that equilibrium unemployment is reduced by profit sharing aslong as the elasticity of substitution between labor and capital is less than one, whereas unemployment is increased if the elasticity of substitution is greater than one. [ABSTRACT FROM AUTHOR]