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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. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  2. Kessing, Sebastian, 2002. "A note on the determinants of labour share movements," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-30, Social Science Research Center Berlin (WZB).
  3. Michele Boldrin & Michael Horvath, 1994. "Labor Contracts and Business Cycles," Discussion Papers 1068, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Evans, Charles L., 1992. "Productivity shocks and real business cycles," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 191-208, April.
  5. Gomme, Paul & Greenwood, Jeremy, 1995. "On the cyclical allocation of risk," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 91-124.
  6. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
  7. Robert E. Hall, 1988. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Hanno Lustig & Stijn Van Nieuwerburgh, 2005. "The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street," NBER Working Papers 11564, National Bureau of Economic Research, Inc.
  2. Alfonso Arpaia & Esther Pérez & Karl Pichelmann, 2009. "Understanding Labour Income Share Dynamics in Europe," European Economy - Economic Papers 379, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Nicolas Coeurdacier & Pierre-Olivier Gourinchas, 2011. "When Bonds Matter: Home Bias in Goods and Assets," NBER Working Papers 17560, National Bureau of Economic Research, Inc.
  4. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez, 2007. "How Structural Are Structural Parameters?," NBER Working Papers 13166, National Bureau of Economic Research, Inc.
  5. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
  6. 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.
  7. Fabien Tripier, 2009. "Elasticity of factor substitution and the rise in labor's share of income during the Great Depression," Working Papers hal-00419343, HAL.
  8. 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 003105, UNIVERSIDAD DEL ROSARIO.
  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 105, Society for Economic Dynamics.

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