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I study trends in labor share and earnings inequality in the context of an on-the-job search model featuring heterogeneous wage contracts. In the model, a shift toward employment contracts with upwardly-re-negotiable wages implies a decrease in labor share and an increase in inequality. Using the German social security register, I assess the ability of this mechanism to account for trends in inequality and labor share observed in that country. I find a secular trend toward renegotiable wage contracts which accelerates in the late 1990's matching the observed series for inequality and labor share over the same horizon. Further, I find that industries in which the incidence of renegotiable contracts increases most also experience larger increases in inequality and larger declines in labor share.
