Understanding the Dynamics of Labour Shares and Inflation

Martina Lawless and Karl Whelan ()

No 4/RT/07, Research Technical Papers from Central Bank of Ireland

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.

JEL-codes: E24 E31 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2007-05
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Understanding the dynamics of labor shares and inflation (2011)
Working Paper: Understanding the dynamics of labor shares and inflation (2007)
Working Paper: Understanding the dynamics of labor shares and inflation (2007)
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