Intangible Capital and the Rise in Wage and Hours Volatility

In a standard real business cycle model extended to include intangible capital (IC) I show that a rise in the income share of IC in the production function, in line with data can account for a significant share of the increase in real wage volatility (both absolute and relative to income) and labor input volatility (relative to income) observed in the U.S. since the mid 1980's even as volatility of output declined. Intangible capital accumulates stochastically and similar to final goods requires physical capital, intangible capital and labor to produce. Under these conditions an increase in the share of IC in production increases the propagation of the IC-specific shock which raises (absolute and relative) wage and labor input volatility. The higher propagation of the IC shock also accounts for the large decline in the pro-cyclicality of labor productivity (relative to both output and labor) observed during this period.