The Link Between Monetary Policy and the Labor Share – New Empirical Evidence and Theoretical Considerations

Harald Badinger, Christian Glocker and Stefan Schiman-Vukan
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Harald Badinger: WIFO
Christian Glocker: WIFO

No 729, WIFO Working Papers from WIFO

Abstract: Using a structural VAR with a relatively agnostic identification based on narrative sign restrictions, this paper, in line with recent empirical evidence, documents an increase in the labor share following restrictive monetary policy in the euro area. We then complement the empirical analysis with a theoretical investigation that provides mechanisms linking monetary policy and the labor share – a connection that has so far been regarded as lacking an explanation. Specifically, we show that the observed responses of the labor share, real wages, and productivity to a monetary policy shock can be reconciled within an otherwise standard New Keynesian framework once capital accumulation is introduced and both nominal and real frictions – in particular, labor adjustment costs – are incorporated.

Keywords: Monetary policy; Labor share; Euro area; Structural VAR; New-Keynesian model; Labor market frictions (search for similar items in EconPapers)
Pages: 74 pages
Date: 2026-05-27
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Persistent link: https://EconPapers.repec.org/RePEc:wfo:wpaper:y:2026:i:729

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