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. Profits' share is strongly pro-cyclical, 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 those 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 that there is 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 US data but a feature that models of aggregate fluctuations have had difficulty achieving.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1078.
Date of creation: 2011
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Other versions of this item:
- Enchuan Shao & Pedro Silos, 2014. "Accounting For The Cyclical Dynamics Of Income Shares," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 52(2), pages 778-795, 04.
- Enchuan Shao & Pedro Silos, 2011. "Accounting for the cyclical dynamics of income shares," Working Paper, Federal Reserve Bank of Atlanta 2011-09, Federal Reserve Bank of Atlanta.
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
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- Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(8), pages 931-948, November.
- Shao, Enchuan & Silos, Pedro, 2013. "Entry costs and labor market dynamics," European Economic Review, Elsevier, Elsevier, vol. 63(C), pages 243-255.
- Andrea Colciago & Lorenza Rossi, 2013. "Firm Entry, Endogenous Markups and the Dynamics of the Labor Share of Income," DNB Working Papers, Netherlands Central Bank, Research Department 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.
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