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Understanding the dynamics of labor shares and inflation

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  • Lawless, Martina
  • Whelan, Karl T.

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 labor share of income. GaI´ et al. (2001) argue that the model explains the combination of declining inflation and labor shares in Euro area. In this paper, we show that with realistic parameters, the canonical Calvo-style model cannot explain the joint behavior of inflation and the labor share in Europe. In addition, we show that the model fails very badly in sectoral data with consistently negative estimated coefficients on the labor share in a number of different inflation specifications. Indeed, the use of a traditional output gap measure proved more successful in terms of a positive relationship with inflation.

Suggested Citation

  • Lawless, Martina & Whelan, Karl T., 2011. "Understanding the dynamics of labor shares and inflation," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 121-136, June.
  • Handle: RePEc:eee:jmacro:v:33:y:2011:i:2:p:121-136
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    Cited by:

    1. Milda Norkute, 2015. "Can the sectoral New Keynesian Phillips curve explain inflation dynamics in the Euro Area?," Empirical Economics, Springer, pages 1191-1216.
    2. Christoffel, Kai & Kuester, Keith & Linzert, Tobias, 2009. "The role of labor markets for euro area monetary policy," European Economic Review, Elsevier, vol. 53(8), pages 908-936, November.
    3. Toshitaka Sekine, 2009. "Another Look at Global Disinflation," NBER Chapters,in: Financial Globalization, 20th Anniversary Conference, NBER-TCER-CEPR National Bureau of Economic Research, Inc.
    4. Abbas, Syed K. & Bhattacharya, Prasad Sankar & Sgro, Pasquale, 2016. "The new Keynesian Phillips curve: An update on recent empirical advances," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 378-403.
    5. Kuttner, Ken & Robinson, Tim, 2010. "Understanding the flattening Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 110-125, August.
    6. Medel, Carlos A., 2015. "Forecasting Inflation with the Hybrid New Keynesian Phillips Curve: A Compact-Scale Global VAR Approach," MPRA Paper 67081, University Library of Munich, Germany.
    7. Agénor, Pierre-Richard & Bayraktar, Nihal, 2010. "Contracting models of the Phillips curve empirical estimates for middle-income countries," Journal of Macroeconomics, Elsevier, pages 555-570.
    8. Emna Trabelsi, 2016. "Transparency on inflation of OECD countries? An Application of LSDVC Estimator on a dynamic Panel Model," Economics Bulletin, AccessEcon, vol. 36(2), pages 1095-1126.
    9. Agénor, Pierre-Richard & Bayraktar, Nihal, 2010. "Contracting models of the Phillips curve empirical estimates for middle-income countries," Journal of Macroeconomics, Elsevier, pages 555-570.
    10. Chi, Wei & Qian, Xiaoye, 2013. "Regional disparity of labor's share in China: Evidence and explanation," China Economic Review, Elsevier, vol. 27(C), pages 277-293.
    11. Petrella, Ivan & Santoro, Emiliano, 2012. "Inflation dynamics and real marginal costs: New evidence from U.S. manufacturing industries," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 779-794.
    12. Benjamin Bridgman, 2014. "Is Labor's Loss Capital's Gain? Gross versus Net Labor Shares," BEA Working Papers 0114, Bureau of Economic Analysis.
    13. Dünhaupt, Petra., 2013. "Determinants of functional income distribution : theory and empirical evidence," ILO Working Papers 994841223402676, International Labour Organization.
    14. Claire A. Reicher, 2016. "Matching labor’s share in a search and matching model," Empirical Economics, Springer, pages 1229-1254.
    15. Luciano BOGGIO & Vincenzo DALL’AGLIO & Marco MAGNANI, 2010. "On Labour Shares in Recent Decades: A Survey," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 118(3), pages 283-333.
    16. Belanger, Gilles, 2014. "The Overlooked Assumption Behind the New Keynesian Phillips Curve," MPRA Paper 55629, University Library of Munich, Germany.
    17. Aurelijus Dabušinskas & Dmitry Kulikov, 2007. "New Keynesian Phillips curve for Estonia, Latvia and Lithuania," Bank of Estonia Working Papers 2007-07, Bank of Estonia, revised 26 Aug 2007.
    18. Girardi, Riccardo & Paruolo, Paolo, 2013. "Wages and prices in Europe before and after the onset of the Monetary Union," Economic Modelling, Elsevier, pages 643-653.
    19. Guerriero, Marta & Sen, Kunal, 2012. "What Determines the Share of Labour in National Income? A Cross-Country Analysis," IZA Discussion Papers 6643, Institute for the Study of Labor (IZA).
    20. Malikane, Christopher, 2014. "A new Keynesian triangle Phillips curve," Economic Modelling, Elsevier, vol. 43(C), pages 247-255.
    21. Christopher Malikane & Tshepo Mokoka, 2014. "The new Keynesian Phillips curve: endogeneity and misspecification," Applied Economics, Taylor & Francis Journals, vol. 46(25), pages 3082-3089, September.
    22. repec:ilo:ilowps:484122 is not listed on IDEAS
    23. Michael Siegenthaler & Tobias Stucki, 2014. "Dividing the Pie: The Determinants of Labor's Share of Income on the Firm Level," KOF Working papers 14-352, KOF Swiss Economic Institute, ETH Zurich.

    More about this item

    Keywords

    Inflation Labor shares;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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