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

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  • Joonyoung Hur

    (Department of Economics, Sogang University, Seoul)

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.

Suggested Citation

  • Joonyoung Hur, 2020. "Labor Income Share and Economic Fluctuations: A Sign-restricted VAR Approach," Working Papers 2002, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
    • Handle: RePEc:sgo:wpaper:2002
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    References listed on IDEAS

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    More about this item

    Keywords

    Share of Labor Income; Aggregate Fluctuations; Sign-restricted VAR;
    All these keywords.

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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