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The labour share and the dynamics of output

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  • Christopher Malikane

Abstract

We derive a new Keynesian IS curve that is augmented to capture the direct effects of the labour share on output. Our derivation shows that the direct effect of the labour share on output is ambiguous. Furthermore, theory suggests that the expected labour share negatively affects output. Empirically, we find that the labour share plays a significant role in driving output dynamics. However contrary to theoretical expectation, the expected labour share positively affects output in some cases, a finding we call the ‘labour share puzzle’. We also find that over time, there seems to be a general shift in aggregate demand dynamics towards being profit-led, i.e. rising labour share decreases output. We conclude that policymakers should not ignore the labour share in their decisions.

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  • Christopher Malikane, 2017. "The labour share and the dynamics of output," Applied Economics, Taylor & Francis Journals, vol. 49(37), pages 3741-3750, August.
    • Handle: RePEc:taf:applec:v:49:y:2017:i:37:p:3741-3750
    DOI: 10.1080/00036846.2016.1267845
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