Labor's Share Fluctuations, Biased Technical Change, and the Business Cycle

Review of Economic Dynamics, 2004, vol. 7, issue 4, 916-931

Abstract: We extend the basic RBC model to allow for biased technical changes. One broad definition of biased technical changes is changes that directly affect factor elasticities. Given the link between changes in factor elasticities and factor shares, observed fluctuations in US labor's share are motivation for this study. We find that when the technology shock process is calibrated according to US labor's share dynamics, 93 percent of US GDP volatility is accounted for. The observed countercyclical nature of labor's share is accounted for, although the model correlation is too high. As well, the model exhibits business cycles that are qualitatively similar to those of the standard model with neutral technology shocks. These findings, while robust to the short-run properties of various measures of labor's share, are sensitive to the average labor's share used in calibration, e.g. departing from a baseline calibration value of 63 percent, for steady-state labor's shares of 50 percent and 70 percent the model accounts for 107 percent and 84 percent of US GDP volatility respectively. (Copyright: Elsevier)

Keywords: Biased technical change; business cycles; macroeconomics; real business cycle theory. (search for similar items in EconPapers)
JEL-codes: E13 E17 E32 O30 O33 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (40)

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DOI: 10.1016/j.red.2004.07.001

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