Working Paper: NBER ID: w23647
Authors: Thorsten Drautzburg; Jess Fernández-Villaverde; Pablo Guerrón-Quintana
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: bargaining power; aggregate fluctuations; distribution shocks; labor market
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 |
|---|---|
| distribution shocks (D39) | output (C67) |
| distribution shocks (D39) | unemployment (J64) |
| bargaining power shocks (C79) | wages (J31) |
| productivity shocks (O49) | wages (J31) |
| bargaining power shocks (C79) | output (C67) |
| bargaining power shocks (C79) | consumption units (D11) |
| bargaining power shocks (C79) | labor market dynamics (J29) |
| right-to-work legislation (J58) | capital share (D33) |
| minimum wage changes (J38) | capital income share (D33) |