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Understanding the dynamics of labor shares and inflation
Author(s)
Date Issued
2007-05
Date Available
2008-06-10T16:21:05Z
Abstract
Calvo-style models of nominal rigidities currently provide the dominant paradigm for understanding the linkages between wage and price dynamics. Recent empirical implementations stress the idea that these models link inflation to the behavior of the labour share of income. GalÃ, Gertler, and Lopez-Salido (2001) argue that the model explains the combination of declining inflation and labour shares in Euro area. In this paper, we show that with realistic parameters, the canonical Calvo-style model cannot explain this outcome. In addition, we show that the model fails very badly in sectoral data. We examine the elements underlying the decline in the labour share in Europe, and conclude that the key factors are related to technological and labour market developments not accounted for in the standard New-Keynesian framework.
Type of Material
Technical Report
Publisher
Central Bank of Ireland
Series
Central Bank of Ireland Research Technical Paper
4/RT/07
Copyright (Published Version)
2007 Copyright Central Bank of Ireland
Classification
E31
Subject – LCSH
Labor market--Europe
Inflation (Finance)--Mathematical models
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
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