DP15979 Bargaining Shocks and Aggregate Fluctuations
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.