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Accounting for the Cyclical Dynamics of Income Shares

Author

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  • Pedro Silos

    (Federal Reserve Bank of Atlanta)

  • Enchuan Shao

    (Bank of Canada)

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. Profits' share is strongly pro-cyclical, 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 those 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 that there is 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 US data but a feature that models of aggregate fluctuations have had difficulty achieving.

Suggested Citation

  • Pedro Silos & Enchuan Shao, 2011. "Accounting for the Cyclical Dynamics of Income Shares," 2011 Meeting Papers 1078, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:1078
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    Cited by:

    1. Rada, Codrina & Tavani, Daniele & von Arnim, Rudiger & Zamparelli, Luca, 2023. "Classical and Keynesian models of inequality and stagnation," Journal of Economic Behavior & Organization, Elsevier, vol. 211(C), pages 442-461.
    2. Robert Dixon & Guay C. Lim, 2018. "Labor'S Share, The Firm'S Market Power, And Total Factor Productivity," Economic Inquiry, Western Economic Association International, vol. 56(4), pages 2058-2076, October.
    3. Claire A. Reicher, 2016. "Matching labor’s share in a search and matching model," Empirical Economics, Springer, vol. 50(4), pages 1229-1254, June.
    4. Jose Barrales-Ruiz, Ivan Mendieta-Muñoz, Codrina Rada, Daniele Tavani, Rudiger von Arnim, 2020. "The distributive cycle: Evidence and current debates," Working Paper Series, Department of Economics, University of Utah 2020_07, University of Utah, Department of Economics.
    5. 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.
    6. Tonni, Lorenzo, 2023. "Business cycle and factor income shares: a VAR sign restrictions approach," MPRA Paper 116527, University Library of Munich, Germany.
    7. Klein, Mathias & Winkler, Roland, 2019. "Austerity, inequality, and private debt overhang," European Journal of Political Economy, Elsevier, vol. 57(C), pages 89-106.
    8. Shao, Enchuan & Silos, Pedro, 2017. "Wealth inequality and employment fluctuations," Economic Modelling, Elsevier, vol. 67(C), pages 125-135.
    9. Nikolaos Charalampidis, 2020. "The U.S. Labor Income Share And Automation Shocks," Economic Inquiry, Western Economic Association International, vol. 58(1), pages 294-318, January.
    10. 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.
    11. Sekyu Choi & José-Víctor Ríos-Rull, 2021. "Labour Share and Productivity Dynamics," The Economic Journal, Royal Economic Society, vol. 131(639), pages 2856-2886.
    12. 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 Kiel).
    13. Jose Barrales‐Ruiz & Ivan Mendieta‐Muñoz & Codrina Rada & Daniele Tavani & Rudiger von Arnim, 2022. "The distributive cycle: Evidence and current debates," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 468-503, April.
    14. Bridgman, Benjamin, 2018. "Is Labor'S Loss Capital'S Gain? Gross Versus Net Labor Shares," Macroeconomic Dynamics, Cambridge University Press, vol. 22(8), pages 2070-2087, December.
    15. Tonni, Lorenzo, 2022. "Business cycle and factor income shares: a VAR sign restriction approach," MPRA Paper 114586, University Library of Munich, Germany.
    16. Rossi, Lorenza, 2019. "The overshooting of firms’ destruction, banks and productivity shocks," European Economic Review, Elsevier, vol. 113(C), pages 136-155.
    17. R. Dixon & G.C. Lim, 2017. "Labor's Share, the Firm's Market Power and TFP," Melbourne Institute Working Paper Series wp2017n22, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    18. Shao, Enchuan & Silos, Pedro, 2013. "Entry costs and labor market dynamics," European Economic Review, Elsevier, vol. 63(C), pages 243-255.
    19. Jong-seok Oh, 2023. "Stabilizing the Macroeconomy with Labor Market Policies," Korean Economic Review, Korean Economic Association, vol. 39, pages 205-240.

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    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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