DP14732 The Macroeconomics of Hedging Income Shares

Author(s): Adriana Grasso, Juan Passadore, Facundo Piguillem
Publication Date: May 2020
Date Revised: May 2020
Keyword(s): Income shares fluctuation. Risk Sharing. Asset prices. Corporate Savings Glut
JEL(s): E20, E32, E44, G11
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14732

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.