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ACCOUNTING FOR THE CYCLICAL DYNAMICS OF INCOME SHARES
Author(s) -
SHAO ENCHUAN,
SILOS PEDRO
Publication year - 2014
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12065
Subject(s) - economics , replicate , business cycle , volatility (finance) , factor shares , econometrics , aggregate (composite) , wage share , monetary economics , competition (biology) , income shares , macroeconomics , production (economics) , income distribution , unemployment , mathematical analysis , statistics , materials science , mathematics , inequality , composite material , efficiency wage , ecology , biology
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 five times that of output. Those assumptions relate to the structure of aggregate technology and the degree of competition in factor markets. Despite much evidence in favor of time‐varying income shares, macroeconomics still lacks models that can account for their time series facts. This article 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 weak correlation between the real interest rate and output, a fact in U.S. data but a feature that models of aggregate fluctuations have had difficulty achieving. (JEL E3, E25, J3, E24 )