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In continental Europe, labor shares in national income have exhibited considerable variation since 1970. Empirical and theoretical research suggests that the evolution of labor markets and labor market imperfections can, in part, explain this phenomenon. The author analyzes the role of capital market imperfections in the determination of the distribution of national income, comparing European and Anglo-Saxon countries. The author uses a simple general-equilibrium model to trace the effects of credit and labor market imperfections on factor shares. Simulations indicate that improvements in capital markets can explain lower labor shares. An increase in the degree of employee power results in higher labor shares.
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