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Understanding the Dynamics of Labour Shares and Inflation

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  • Lawless, Martina

    (Central Bank and Financial Services Authority of Ireland)

  • Whelan, Karl

    (University College Dublin)

Abstract

Calvo-style models of nominal rigidities currently provide the dominant paradigm for understanding the linkages between wage and price dynamics. Recent empirical implementations stress the idea that these models link inflation to the behavior of the labour share of income. Galí, Gertler, and Lopez-Salido (2001) argue that the model explains the combination of declining inflation and labour shares in Euro area. In this paper, we show that with realistic parameters, the canonical Calvo-style model cannot explain this outcome. In addition, we show that the model fails very badly in sectoral data. We examine the elements underlying the decline in the labour share in Europe, and conclude that the key factors are related to technological and labour market developments not accounted for in the standard New-Keynesian framework.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 4/RT/07.

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Length: 39 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:cbi:wpaper:4/rt/07

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  1. Nicola GIAMMARIOLI & Julian MESSINA & Thomas STEINBERGER & Chiara STROZZI, 2002. "European Labor Share Dynamics: An Institutional Perspective," Economics Working Papers ECO2002/13, European University Institute.
  2. Argia M. Sbordone, 2001. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Departmental Working Papers 199822, Rutgers University, Department of Economics.
  3. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  4. McAdam, Peter & Willman, Alpo, 2004. "Production, supply and factor shares: an application to estimating German long-run supply," Economic Modelling, Elsevier, vol. 21(2), pages 191-215, March.
  5. Olivier Blanchard, 2006. "European unemployment: the evolution of facts and ideas," Economic Policy, CEPR & CES & MSH, vol. 21(45), pages 5-59, 01.
  6. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
  7. Julio J. Rotemberg & Michael Woodford, 1999. "The Cyclical Behavior of Prices and Costs," NBER Working Papers 6909, National Bureau of Economic Research, Inc.
  8. Emmanuel Dhyne & Luis J. Álvarez & Hervé le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lünnemann & Fabio Rumler & Jouko Vilmunen, 2005. "Price setting in the euro area: Some stylized facts from Individual Consumer Price Data," Banco de Espa�a Working Papers 0528, Banco de Espa�a.
  9. Ricardo J. Caballero & Mohamad L. Hammour, 1997. "Jobless Growth: Appropriability, Factor Substitution, and Unemployment," NBER Working Papers 6221, National Bureau of Economic Research, Inc.
  10. Daron Acemoglu, 2000. "Labor- and Capital- Augmenting Technical Change," NBER Working Papers 7544, National Bureau of Economic Research, Inc.
  11. Bentolila Samuel & Saint-Paul Gilles, 2003. "Explaining Movements in the Labor Share," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-33, October.
  12. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  13. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects Of Regulation And Deregulation In Goods And Labor Markets," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 879-907, August.
  14. Imbs, Jean & Jondeau, Eric & Pelgrin, Florian, 2007. "Aggregating Phillips Curves," CEPR Discussion Papers 6184, C.E.P.R. Discussion Papers.
  15. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  16. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  17. Jeremy Rudd & Karl Whelan, 2007. "Modeling Inflation Dynamics: A Critical Review of Recent Research," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 155-170, 02.
  18. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  19. Jordi Galí & Mark Gertler & J. David López-Salido, 2000. "European Inflation Dynamics," Banco de Espa�a Working Papers 0020, Banco de Espa�a.
  20. Nicoletta Batini & Brian Jackson & Stephen Nickell, 2000. "Inflation Dynamics and the Labour Share in the UK," Discussion Papers 02, Monetary Policy Committee Unit, Bank of England.
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