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Intangible Capital, the Labor Wedge and the Volatility of Corporate Profits

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  • Keqiang Hou
  • Alok Johri

Abstract

Corporate profit is six times more volatile than output. We estimate a dynamic general equilibrium model with intangible capital (IC) using aggregate data on output, investment and hours and find that it generates profits that are over five times as volatile as output. A similar model without IC relies on preference shocks to generate profits that are 3.5 times as volatile as output. Variance decomposition analysis reveals that shocks to IC productivity account for 85 % of the variance of output, and over 50 % of hours and investment. The increased volatility of profits is associated with a time-varying wedge between wages and the marginal product of labor which is shown to be highly correlated with the data-based labor wedge. The estimation identifies the sixties and the nineties as periods of rapid IC accumulation.

Suggested Citation

  • Keqiang Hou & Alok Johri, 2018. "Intangible Capital, the Labor Wedge and the Volatility of Corporate Profits," Department of Economics Working Papers 2018-01, McMaster University.
  • Handle: RePEc:mcm:deptwp:2018-01
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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