DP15979 Bargaining Shocks and Aggregate Fluctuations

Author(s): Thorsten Drautzburg, Jesús Fernández-Villaverde, Pablo Guerron
Publication Date: March 2021
Keyword(s): Aggregate fluctuations, bargaining shocks, Distribution risk, historical narrative, partial filter
JEL(s): E32, E37, E44, J20
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15979

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.