Understanding the dynamics of labor shares and inflation

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Title: Understanding the dynamics of labor shares and inflation
Authors: Whelan, Karl
Lawless, Martina
Permanent link: http://hdl.handle.net/10197/220
Date: May-2007
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. Galí, 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
Copyright (published version): 2007 Copyright Central Bank of Ireland
Keywords: Labour Share;Phillips Curve;Sectoral Data
Subject LCSH: Labor market--Europe
Inflation (Finance)--Mathematical models
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Research Collection

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