Increasing Capital Shares: Causes and Consequences
Friday, Jan. 5, 2018 10:15 AM - 12:15 PM
- Chair: Jesus Fernandez-Villaverde, University of Pennsylvania
Labor Share and Technology Dynamics
AbstractIn this paper we study the business cycle properties of the U.S. labor share, with special emphasis on its overshooting property: After a positive shock to output, the labor share falls temporarily but it quickly rises, staying persistently above average for around thirty quarters. We propose an extension to standard models with labor search frictions where we use putty clay technology and an aggregate technological shock biased towards new investment. Using the model, we study how the discipline imposed by the movements in labor share at business cycle frequency affects predictions of standard models in terms of labor market variables. Our baseline is able to match the overshooting of the labor share and produces significant volatility of hours and unemployment. Thus, we show a novel way in which to overcome the low amplification problem in macroeconomic models (the so called Shimer puzzle), with the added property of being consistent with external empirical evidence.
The Demise of the Treaty of Detroit and (Dis)inflation Dynamics
AbstractA canonical New Keynesian Phillips curve predicts that the current inflation rate is the present value of future unit labor cost, a.k.a. labor income share. According to this framework, disinflation in 1980s and 1990s was possible only if labor income share was expected to fall. In other words, to achieve disinflation, real wage growth must fall behind productivity growth. Hence, the cost of disinflation falls disproportionately on workers. Macroeconomists have not considered the distributional consequences of disinflation. This is partly because most workhorse models analyze the macroeconomic consequences of disinflation from the perspective of a representative agent. What happens if the workers are not the owners of the firms? Disinflation necessarily redistributes national income from workers to the owners of the firms. In this paper, we assume that the labor income share has fallen owing to the decline of workers' bargaining power. We show that disinflation policy is the most effective and the most regressive when the central bank gives up the dual mandate effectively or fails to revise down the natural rate of unemployment in a timely manner.
Political Redistribution Risk and Aggregate Fluctuations
AbstractWe argue that political distribution risk is an important driver of aggregate fluctuations. To that end, we document significant changes in the capital share after large political events, such as the end of dictatorships, political realignments, or modifications in collective bargaining rules in a sample of developed and emerging economies. These policy changes are often associated with significant fluctuations in output and asset prices. We also show, using a Bayesian Proxy-VAR estimated with U.S. data, how distribution shocks cause movements in output, unemployment, and asset pricing. To quantify the importance of these political shocks for the U.S., we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-financial business sector. A one-standard deviation redistribution shock reduces the capital share 0.2% on impact and leads to a drop in output of 0.6%. Also, political distribution risk accounts for 30 to 40% of output volatility and 15 to 25% of the observed volatility of U.S. gross capital shares, depending on the elasticity of substitution between capital and labor. Eliminating political redistribution risk in the U.S. would raise the welfare of the representative household by 1.6% of steady-state consumption.
- E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
- J5 - Labor-Management Relations, Trade Unions, and Collective Bargaining