Working Paper: CEPR ID: DP14732
Authors: Adriana Grasso; Juan Passadore; Facundo Piguillem
Abstract: The recent debate about the falling labor share has brought the attention to the income shares' trends, but less attention has been devoted to their variability. In this paper, we analyze how their fluctuations can be insured between workers and capitalists, and the corresponding implications for financial markets. We study a neoclassical growth model with aggregate shocks that affect income shares and financial frictions that prevent firms from fully insuring idiosyncratic risk. We examine theoretically how aggregate risk sharing is distorted by the combination of idiosyncratic risk and moving shares. Accumulation of safe assets by firms and risky assets by households emerges naturally as a tool to insure income shares' risk. We calibrate the model to the U.S. economy and show that low rates, rising capital shares, and accumulation of safe assets by firms and risky assets by households can be rationalized by persistent shocks to the labor share.
Keywords: income shares; fluctuation; risk sharing; asset prices; corporate savings glut
JEL Codes: E20; E32; E44; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fluctuations in income shares (E25) | financial markets (G10) |
| fluctuations in income shares (E25) | precautionary savings (D14) |
| precautionary savings (D14) | risk-free interest rate (E43) |
| precautionary savings (D14) | risk premium (G19) |
| capital share increases (D33) | capitalists' risk absorption (G32) |
| capitalists' risk absorption (G32) | aggregate risk sharing (C43) |
| accumulation of safe assets by firms (G32) | income shares risk (D33) |
| accumulation of risky assets by households (D14) | income shares risk (D33) |