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The Missing Link: Monetary policy and the labor share

Author

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  • Cristiano Cantore

    (Bank of England
    Centre for Macroeconomics (CFM)
    University of Surrey)

  • Filippo Ferroni

    (Federal Reserve Bank of Chicago)

  • Miguel A. Leon-Ledesma

    (University of Kent)

Abstract

The textbook New-Keynesian (NK) model implies that the labor share is pro-cyclical conditional on a monetary policy shock. We present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages and labor productivity during the Great Moderation period in the US, the Euro Area, the UK, Australia, and Canada. We show that this is inconsistent not only with the basic NK model, but with a wide variety of NK models commonly used for monetary policy analysis and where the direct link between the labor share and the markup can be broken down.

Suggested Citation

  • Cristiano Cantore & Filippo Ferroni & Miguel A. Leon-Ledesma, 2018. "The Missing Link: Monetary policy and the labor share," Discussion Papers 1829, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1829
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    Cited by:

    1. Chu, Shiou-Yen, 2020. "A note on labor share, price markup and monetary policy," Economics Letters, Elsevier, vol. 192(C).
    2. Siena Daniele, & Zago Riccardo., 2021. "Job Polarization and the Flattening of the Price Phillips Curve," Working papers 819, Banque de France.
    3. Florin O. Bilbiie & Marc J. Melitz, 2020. "Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier," NBER Working Papers 28258, National Bureau of Economic Research, Inc.
    4. Matteo G. Richiardi & Luis Valenzuela, 2024. "Firm heterogeneity and the aggregate labour share," LABOUR, CEIS, vol. 38(1), pages 66-101, March.
    5. Cantore, Cristiano & Freund, Lukas B., 2021. "Workers, capitalists, and the government: fiscal policy and income (re)distribution," Journal of Monetary Economics, Elsevier, vol. 119(C), pages 58-74.
    6. Kraft, Kornelius & Lammers, Alexander, 2021. "Bargaining Power and the Labor Share - a Structural Break Approach," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242342, Verein für Socialpolitik / German Economic Association.
    7. Jan Philipp Fritsche & Lea Steininger, 2021. "Zooming in on Monetary Policy - The Labor Share and Production Dynamics of Two Million Firms," Discussion Papers of DIW Berlin 1967, DIW Berlin, German Institute for Economic Research.
    8. Cristiano Cantore & Filippo Ferroni & Miguel León-Ledesma, 2021. "The Missing Link: Monetary Policy and The Labor Share," Journal of the European Economic Association, European Economic Association, vol. 19(3), pages 1592-1620.
    9. Evgenidis, Anastasios & Fasianos, Apostolos, 2023. "Modelling monetary policy’s impact on labour markets under Covid-19," Economics Letters, Elsevier, vol. 230(C).
    10. Bilbiie, F. O. & Trabandt, M., 2023. "Sticky Prices or Sticky Wages? An Equivalence Result," Cambridge Working Papers in Economics 2369, Faculty of Economics, University of Cambridge.
    11. Adriana Grasso & Juan Passadore & Facundo Piguillem, 2020. "The Macroeconomics of Hedging Income Shares," EIEF Working Papers Series 2009, Einaudi Institute for Economics and Finance (EIEF), revised May 2020.
    12. Nikolaos Charalampidis, 2020. "The U.S. Labor Income Share And Automation Shocks," Economic Inquiry, Western Economic Association International, vol. 58(1), pages 294-318, January.
    13. Kapetanios, George & Millard, Stephen & Price, Simon & Petrova, Katerina, 2018. "Time varying cointegration and the UK Great Ratios," Essex Finance Centre Working Papers 23320, University of Essex, Essex Business School.
    14. Lea Steininger & Jan Philipp Fritsche, 2022. "The Labor Share is a Catalyst for Monetary Policy - Two Million Firms' Production Dynamics," Department of Economics Working Papers wuwp326, Vienna University of Economics and Business, Department of Economics.
    15. Shiou‐Yen Chu, 2022. "Markups, inequality and monetary‐fiscal policies," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(4), pages 367-395, September.
    16. Laura Gómez-Acevedo & Marc Hofstetter, 2020. "Disinflations and income distribution," Documentos CEDE 18481, Universidad de los Andes, Facultad de Economía, CEDE.
    17. Christopher J. Nekarda & Valerie A. Ramey, 2020. "The Cyclical Behavior of the Price‐Cost Markup," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 319-353, December.
    18. Sekyu Choi & José-Víctor Ríos-Rull, 2021. "Labour Share and Productivity Dynamics," The Economic Journal, Royal Economic Society, vol. 131(639), pages 2856-2886.
    19. Carbajal-De-Nova, Carolina, 2021. "Wages and inflation in Mexican manufacturing. A two-period comparison: 1994-2003 and 2007-2016," MPRA Paper 109555, University Library of Munich, Germany.
    20. Marius Clemens & Ulrich Eydam & Maik Heinemann, 2020. "Inequality over the Business Cycle – The Role of Distributive Shocks," Discussion Papers of DIW Berlin 1852, DIW Berlin, German Institute for Economic Research.
    21. Greg Kaplan & Piotr Zoch, 2020. "Markups, Labor Market Inequality and the Nature of Work," NBER Working Papers 26800, National Bureau of Economic Research, Inc.
    22. Lenney, Jamie, 2022. "Monetary policy transmission, the labour share and HANK models," Bank of England working papers 960, Bank of England.
    23. Andrejs Zlobins, 2021. "On the Time-varying Effects of the ECB's Asset Purchases," Working Papers 2021/02, Latvijas Banka.
    24. Daniil Lomonosov, 2023. "Shocks of Business Activity and Specific Shocks to Oil Market in DSGE Model of Russian Economy and Their Influence Under Different Monetary Policy Regimes," Russian Journal of Money and Finance, Bank of Russia, vol. 82(4), pages 44-79, December.

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    More about this item

    Keywords

    Labor share; Monetary policy shocks; DSGE models;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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