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The Link Between Monetary Policy and the Labor Share - New Empirical Evidence and Theoretical Considerations

Author

Listed:
  • Harald Badinger
  • Christian Glocker
  • Stefan Schiman-Vukan

Abstract

Using a structural VAR with a relatively agnostic identification based on narrative sign restrictions, this paper, in line with recent empirical evidence, documents an increase in the labor share following restrictive monetary policy in the euro area. We then complement the empirical analysis with a theoretical investigation that provides mechanisms linking monetary policy and the labor share — a connection that has so far been regarded as lacking an explanation. Specifically, we show that the observed responses of the labor share, real wages, and productivity to a monetary policy shock can be reconciled within an otherwise standard New Keynesian framework once capital accumulation is introduced and both nominal and real frictions — in particular, labor adjustment costs — are incorporated.

Suggested Citation

  • Harald Badinger & Christian Glocker & Stefan Schiman-Vukan, 2026. "The Link Between Monetary Policy and the Labor Share - New Empirical Evidence and Theoretical Considerations," CESifo Working Paper Series 12709, CESifo.
    • Handle: RePEc:ces:ceswps:_12709
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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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