Accounting for the cyclical dynamics of income shares
AbstractOver the business cycle, labor's share of output is negatively but weakly correlated with output, and it lags output by about four quarters. Profit's share is strongly procyclical. It neither leads nor lags output, and its volatility is about four times that of output. Despite the importance of understanding the dynamics of income shares for understanding aggregate technology and the degree of competition in factor markets, macroeconomics lacks models that can account for these dynamics. This paper constructs a model that can replicate those facts. We introduce costly entry of firms in a model with frictional labor markets and find a link between the ability of the model to replicate income shares' dynamics and the ability of the model to amplify and propagate shocks. That link is a countercyclical real interest rate, a well-known fact in U.S. data but a feature that models of aggregate fluctuations have had difficulty achieving.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2011-09.
Date of creation: 2011
Date of revision:
Other versions of this item:
- Pedro Silos & Enchuan Shao, 2011. "Accounting for the Cyclical Dynamics of Income Shares," 2011 Meeting Papers 1078, Society for Economic Dynamics.
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- 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.
- Andrea Colciago & Lorenza Rossi, 2013. "Firm Entry, Endogenous Markups and the Dynamics of the Labor Share of Income," DNB Working Papers 367, Netherlands Central Bank, Research Department.
- Christopher Reicher, 2011. "Matching labor’s share in a search and matching model," Kiel Working Papers 1733, Kiel Institute for the World Economy.
- Shao, Enchuan & Silos, Pedro, 2013. "Entry costs and labor market dynamics," European Economic Review, Elsevier, vol. 63(C), pages 243-255.
- Buffie, Edward F., 2013. "The Taylor principle fights back, Part I," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2771-2795.
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