Labor Income Share and Economic Fluctuations: A Sign-restricted VAR Approach

Joonyoung Hur ()
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Joonyoung Hur: Department of Economics, Sogang University, Seoul

No 2002, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: Utilizing a sign-restricted VAR model, this paper studies how changes in the labor income share affect business cycle fluctuations for the US and Korea. Analyses of both countries’ annual data from 1970 to 2017 reveal that the effect is insignificant for the US, whereas the empirical evidence for Korea is significant and hinges critically upon how real wages change in times of a rising labor income share. This finding indicates that a higher labor income share accompanied by rising real wages tends to be expansionary as GDP, consumption and investment increase. In contrast, an increase in the labor income share coinciding with falling real wages results in lower GDP, consumption and investment in the short run as well as lower exports in the medium run.

Keywords: Share of Labor Income; Aggregate Fluctuations; Sign-restricted VAR (search for similar items in EconPapers)
JEL-codes: C32 D33 E20 E32 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2020
New Economics Papers: this item is included in nep-mac
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