Accounting for the Cyclical Dynamics of Income Shares

Federal Reserve Bank of Atlanta Working Paper 2011-09

40 Pages Posted: 6 Apr 2011

See all articles by Enchuan Shao

Enchuan Shao

University of Saskatchewan - Economics

Pedro Silos

Federal Reserve Bank of Atlanta

Date Written: March 2011

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.

Keywords: labor's share, frictional labor market, firm entry

JEL Classification: E3, E25, J3, E24

Suggested Citation

Shao, Enchuan and Silos, Pedro, Accounting for the Cyclical Dynamics of Income Shares (March 2011). Federal Reserve Bank of Atlanta Working Paper 2011-09, Available at SSRN: https://ssrn.com/abstract=1800702 or http://dx.doi.org/10.2139/ssrn.1800702

Enchuan Shao

University of Saskatchewan - Economics ( email )

9 Campus Drive
Saskatoon, Saskatchewan S7N 5A5
CANADA

Pedro Silos (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8630 (Phone)
404-498-8956 (Fax)

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