DP13551 The Missing Link: Monetary Policy and The Labor Share

Author(s): Cristiano Cantore, Filippo Ferroni, Miguel León-Ledesma
Publication Date: February 2019
Date Revised: February 2019
Keyword(s): Labor Share, monetary policy shocks
JEL(s): C52, E23, E32
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13551

The textbook New-Keynesian (NK) model implies that the labor share is pro-cyclical conditional on a monetary policy shock. We present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages and labor productivity during the Great Moderation period in the US, the Euro Area, the UK, Australia, and Canada. We show that this is inconsistent not only with the basic NK model, but with a wide variety of NK models commonly used for monetary policy analysis and where the direct link between the labor share and the markup can be broken.