Macroeconomic Risk and the Labor Share of Income – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Macroeconomic Risk and the Labor Share of Income

Author:

Gregor Schubert

Master Program:

Economics

Paper Abstract:

This paper suggests a novel explanation for variations in the labor share of income: the change in the variance and covariance of macroeconomic shocks over time. I present a model of the labor market that links the labor share with macroeconomic risk. In an economy where firms contract nominal wage payments in advance, real wages and profits fluctuate with unexpected inflation shocks. Consequently, both workers and capital investors demand risk premia that depend on the variance of inflation and the covariance of productivity and inflation shocks, respectively. If workers are heterogeneous with regard to their risk aversion and firms pay each his reservation wage, then this model implies that the equilibrium labor share of income depends negatively on these inflation and covariance risk factors. Using panel data for 23 OECD countries from 1975 to 2011, I show that these theoretical predictions also hold empirically: The variance of inflation and the covariance of real GDP growth with inflation explain a substantial part of the variation in the labor share, even after controlling for other potential determinants of the factor shares of income.

Read the full paper or view slides below:

Spotlight on Faculty Research: Prof. Pau Olivella

Prof. Pau Olivella (PhD, Northwestern) is a Barcelona GSE Affiliated Professor and Associate Professor at Universitat Autònoma de Barcelona. He is also the Research Director for the Heath Economics and Policy program at the GSE. This spring, Prof. Olivella was the co-author for an article on the following health economics topic-

Does having a voluntary private health insurance sector lead to costs savings?

In many countries, including the UK, a fraction of the population enjoys public and private health insurance covering a similar portfolio of services; hence, they have duplicate coverage. In principle, this could translate into lower healthcare costs in the public health system. Indeed, an emprirical study by Pau Olivella and Marcos Vera-Hernandez (UCL), suggests that people in the UK who buy their own private health insurance are more likely to use healthcare services than those who receive insurance as a fringe benefit of their job. For example, they are 50% more likely to be hospitalised than those who got insurance through their employer.

But are these individuals really in worse health? Analysis of data from the British Household Panel Survey shows they are not. Indeed, on average, the number of health problems faced by those who purchase private insurance is the same as for those who get insurance through the employer. In fact, the higher tendency of insurance buyers to use healthcare services comes from their preferences for health. In particular, they are 7 percentage points more likely to state that health is very important for them. Therefore, it all boils down to another empirical question for further investigation: what are the true drivers of healthcare costs?