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Labor's Share Fluctuations, Biased Technical Change, and the Business Cycle

  • Andrew Young

    (Emory University)

We extend the basic RBC model to allow for biased technical changes. One broad definition of biased technical changes is changes that directly affect factor elasticities. Given the link between changes in factor elasticities and factor shares, observed fluctuations in US labor's share are motivation for this study. We find that when the technology shock process is calibrated according to US labor's share dynamics, 93 percent of US GDP volatility is accounted for. The observed countercyclical nature of labor's share is accounted for, although the model correlation is too high. As well, the model exhibits business cycles that are qualitatively similar to those of the standard model with neutral technology shocks. These findings, while robust to the short-run properties of various measures of labor's share, are sensitive to the average labor's share used in calibration, e.g. departing from a baseline calibration value of 63 percent, for steady-state labor's shares of 50 percent and 70 percent the model accounts for 107 percent and 84 percent of US GDP volatility respectively. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2004.07.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 7 (2004)
Issue (Month): 4 (October)
Pages: 916-931

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Handle: RePEc:red:issued:v:7:y:2004:i:4:p:916-931
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  1. Gomme, Paul & Greenwood, Jeremy, 1995. "On the cyclical allocation of risk," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 91-124.
  2. Kessing, Sebastian G., 2003. "A note on the determinants of labour share movements," Economics Letters, Elsevier, vol. 81(1), pages 9-12, October.
  3. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report 102, Federal Reserve Bank of Minneapolis.
  4. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  5. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  6. Charles L. Evans, 1991. "Productivity shocks and real business cycles," Working Paper Series, Macroeconomic Issues 91-22, Federal Reserve Bank of Chicago.
  7. Michele Boldrin & Michael Horvath, 1994. "Labor Contracts and Business Cycles," Discussion Papers 1068, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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