Golden Rules of Wages

Abstract

We consider a neoclassical growth model where labor collectively chooses the labor share to maximize its steady-state wage rate. If the labor share increases relative to the competitive share, labor captures a larger share of a smaller total income. At a higher labor share the incentives to invest are lower and the steady-state capital to labor ratio is lower. We derive the golden rule of wages: set labor share equal to the elasticity of output with respect to labor. This is precisely the competitive outcome. We also consider the model with two types of labor: organized and unorganized. In this case, organized labor may choose a higher than competitive income share. Relative to the Cobb-Douglas case, when the elasticity of substitution is less than unity the chosen organized labor share is higher. We also analyze a version of the model that incorporates a tradeoff between collective bargaining opportunities and skill acquisition.