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Accounting for the cyclical dynamics of income shares

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  • Enchuan Shao
  • Pedro Silos

Abstract

Over the business cycle, labor's share of output is negatively but weakly correlated with output, and it lags output by about four quarters. Profit's share is strongly procyclical. 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 these 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 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 U.S. data but a feature that models of aggregate fluctuations have had difficulty achieving.

Suggested Citation

  • Enchuan Shao & Pedro Silos, 2011. "Accounting for the cyclical dynamics of income shares," FRB Atlanta Working Paper 2011-09, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2011-09
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    References listed on IDEAS

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    1. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
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    Citations

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    Cited by:

    1. Claire A. Reicher, 2016. "Matching labor’s share in a search and matching model," Empirical Economics, Springer, vol. 50(4), pages 1229-1254, June.
    2. Cantore, Cristiano & Levine, Paul & Pearlman, Joseph & Yang, Bo, 2015. "CES technology and business cycle fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 133-151.
    3. repec:eee:ecmode:v:67:y:2017:i:c:p:125-135 is not listed on IDEAS
    4. Andrea Colciago & Lorenza Rossi, 2013. "Firm Entry, Endogenous Markups and the Dynamics of the Labor Share of Income," DNB Working Papers 367, Netherlands Central Bank, Research Department.
    5. Reicher, Christopher Phillip, 2011. "Matching labor's share in a search and matching model," Kiel Working Papers 1733, Kiel Institute for the World Economy (IfW).
    6. Benjamin Bridgman, 2014. "Is Labor's Loss Capital's Gain? Gross versus Net Labor Shares," BEA Working Papers 0114, Bureau of Economic Analysis.
    7. Lorenza Rossi, 2018. "The Overshooting of Firms Destruction, Banks and Productivity Shocks," DEM Working Papers Series 147, University of Pavia, Department of Economics and Management.
    8. Shao, Enchuan & Silos, Pedro, 2013. "Entry costs and labor market dynamics," European Economic Review, Elsevier, vol. 63(C), pages 243-255.

    More about this item

    JEL classification:

    • 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; Aggregate Human Capital; Aggregate Labor Productivity

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