Bargaining Shocks and Aggregate Fluctuations
Abstract: We argue that social and political risk causes signiﬁcant aggregate ﬂuctuations by changing bargaining power. To that end, we document signiﬁcant changes in the capital share after large political events, such as political realignments, modiﬁcations in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with signiﬁcant ﬂuctuations in output. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output and unemployment. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-ﬁnancial business sector and we back out the evolution of the bargaining power of workers over time using a new methodological approach, the partial ﬁlter. 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.
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Provider: Federal Reserve Bank of Philadelphia
Part of Series: Working Papers
Publication Date: 2020-03-12