This paper presents a theory of how factor income shares are determined in an environment with labor market frictions and heterogeneous firms. I assume neither a specific aggregate production function nor competitive factor markets. Instead, I first develop microfoundations for an aggregate...

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...