Working Paper: CEPR ID: DP15979
Authors: Jess Fernández-Villaverde; Thorsten Drautzburg; Pablo Guerrón
Abstract: We argue that social and political risk causes significant aggregate fluctuations by changing workers' bargaining power. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks trigger output and unemployment movements. To quantify the aggregate importance of these distribution shocks, we extend an otherwise standard neoclassical growth economy. We model distribution shocks as exogenous changes in workers' bargaining power in a labor market with search and matching. We calibrate our economy to the U.S. corporate non-financial business sector, and we back out the evolution of workers' bargaining power. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 28% of aggregate fluctuations and have a welfare cost of 2.4% in consumption units.
Keywords: distribution risk; bargaining shocks; aggregate fluctuations; partial filter; historical narrative
JEL Codes: E32; E37; E44; J20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bargaining power shocks (C79) | aggregate economic fluctuations (E39) |
| positive shock to productivity (O49) | output increases (E23) |
| decrease in workers' bargaining power (F66) | decrease in wages (J31) |
| decrease in workers' bargaining power (F66) | increase in output (E23) |
| right-to-work legislation (J58) | increase in state capital share (H79) |
| increases in statutory minimum wage (J38) | decrease in capital share (D33) |
| bargaining shocks (C79) | movements in output and unemployment (E24) |
| bargaining shocks (C79) | welfare cost in consumption units (D69) |