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Labor's Share Fluctuations, Biased Technical Change, and the Business Cycle

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  • Andrew Young

    (Emory University)

Abstract

We extend the basic RBC model to allow for biased technical changes. One broad definition of biased technical changes is changes that directly affect factor elasticities. Given the link between changes in factor elasticities and factor shares, observed fluctuations in US labor's share are motivation for this study. We find that when the technology shock process is calibrated according to US labor's share dynamics, 93 percent of US GDP volatility is accounted for. The observed countercyclical nature of labor's share is accounted for, although the model correlation is too high. As well, the model exhibits business cycles that are qualitatively similar to those of the standard model with neutral technology shocks. These findings, while robust to the short-run properties of various measures of labor's share, are sensitive to the average labor's share used in calibration, e.g. departing from a baseline calibration value of 63 percent, for steady-state labor's shares of 50 percent and 70 percent the model accounts for 107 percent and 84 percent of US GDP volatility respectively. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2004.07.001
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 7 (2004)
Issue (Month): 4 (October)
Pages: 916-931

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Handle: RePEc:red:issued:v:7:y:2004:i:4:p:916-931

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Related research

Keywords: Biased technical change; business cycles; macroeconomics; real business cycle theory.;

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References

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  1. Boldrin, Michael & Horvath, Michael, 1995. "Labor Contracts and Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(5), pages 972-1004, October.
  2. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  3. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(5), pages 921-47, October.
  4. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  5. Kessing, Sebastian G., 2003. "A note on the determinants of labour share movements," Economics Letters, Elsevier, Elsevier, vol. 81(1), pages 9-12, October.
  6. Evans, Charles L., 1992. "Productivity shocks and real business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 29(2), pages 191-208, April.
  7. Gomme, P. & Greenwood, J., 1993. "On the Cyclical Allocation of Risk," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 355, University of Rochester - Center for Economic Research (RCER).
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Citations

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Cited by:
  1. Hanno Lustig & Stijn Van Nieuwerburgh, 2008. "The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(5), pages 2097-2137, September.
  2. Jesús Fernández-Villaverde & Juan F Rubio-Ramírez, 2007. "How Structural Are Structural Parameters?," Levine's Bibliography 843644000000000057, UCLA Department of Economics.
  3. Fabien Tripier, 2009. "Elasticity of factor substitution and the rise in labor's share of income during the Great Depression," Working Papers, HAL hal-00419343, HAL.
  4. Hernando Zuleta & Andrew T. Young, 2007. "Labor's shares - aggregate and industry: accounting for both in a model of unbalanced growth with induced innovation," DOCUMENTOS DE TRABAJO, UNIVERSIDAD DEL ROSARIO 003105, UNIVERSIDAD DEL ROSARIO.
  5. Alfonso Arpaia & Esther Pérez & Karl Pichelmann, 2009. "Understanding Labour Income Share Dynamics in Europe," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 379, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  6. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(8), pages 931-948, November.
  7. Coeurdacier, Nicolas & Gourinchas, Pierre-Olivier, 2011. "When Bonds Matter: Home Bias in Goods and Assets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8649, C.E.P.R. Discussion Papers.
  8. Shigeru Wakita, 2006. "The Lost Decade in the Japanese Labor Market : Labor’s share and Okun’s Law," Labor Economics Working Papers 22317, East Asian Bureau of Economic Research.
  9. Stijn Van Nieuwerburgh & Hanno Lustig, 2005. "The Returns on Human Wealth: Good News on Wall Street is Bad News on Main Street," 2005 Meeting Papers, Society for Economic Dynamics 105, Society for Economic Dynamics.

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