Publications
Olivier Giovannoni
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Working Paper No. 807 | June 2014
Recent research stresses the macroeconomic dimension of income distribution, but no theory has yet emerged. In this note, we introduce factor shares into popular growth models to gain insights into the macroeconomic effects of income distribution. The cost of modifying existing models is low compared to the benefits. We find, analytically, that (1) the multiplier is equal to the inverse of the labor share and is about 1.4; (2) income distribution matters mostly in the medium run; (3) output is wage led in the short run, i.e., as long as unemployment persists; (4) capacity expansion is profit led in the full-employment long run, but this is temporary and unstable.
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Working Paper No. 805 | May 2014
Measures and Structural Factors
Economic theory frequently assumes constant factor shares and often treats the topic as secondary. We will show that this is a mistake by deriving the first high-frequency measure of the US labor share for the whole economy. We find that the labor share has held remarkably steady indeed, but that the quasi-stability masks a sizable composition effect that is detrimental to labor. The wage component is falling fast and the stability is achieved by an increasing share of benefits and top incomes. Using NIPA and Piketty-Saez top-income data, we estimate that the US bottom 99 percent labor share has fallen 15 points since 1980. This amounts to a transfer of $1.8 trillion from labor to capital in 2012 alone and brings the US labor share to its 1920s level. The trend is similar in Europe and Japan. The decrease is even larger when the CPI is used instead of the GDP deflator in the calculation of the labor share.
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Working Paper No. 804 | May 2014
Empirical Studies
In this second part of our study we survey the rapidly expanding empirical literature on the determinants of the functional distribution of income. Three major strands emerge: technological change, international trade, and financialization. All contribute to the fluctuations of the labor share, and there is a significant amount of self-reinforcement among these factors. For the case of the United States, it seems that the factors listed above are by order of increasing importance. We conclude by noting that the falling US wage shares cointegrates with rising inequality and a rising top 1 percent income share. Thus, all measures of income distribution provide the same picture. Liberalization and financialization worsen economic inequality by raising top incomes, unless institutions are strongly redistributive.
The labor share has also fallen, for structural reasons and for reasons related to economic policy. Such explanations are left to parts III and IV of our study, respectively. Part I investigated the theories of income distribution.
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Working Paper No. 803 | May 2014
Theories
This series of working papers explores a theme enjoying a tremendous resurgence: the functional distribution of income—the division of aggregate income by factor share. This first installment surveys some landmark theories of income distribution. Some provide a technology-based account of the relative shares while others provide a demand-driven explanation (Keynes, Kalecki, Kaldor, Goodwin). Two questions lead to a better understanding of the literature: is income distribution assumed constant?, and is income distribution endogenous or exogenous? However, and despite their insights, these theories alone fail to fully explain the current deterioration of income distribution.
Subsequent installments are dedicated to analyzing the empirical literature (part II), to the measurement and composition of the relative shares (part III), and to a study of the role of economic policy (part IV).
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Working Paper No. 755 | February 2013
Building an Argument for a Shared Society
This paper presents a review of the literature on the economics of shared societies. As defined by the Club de Madrid, shared societies are societies in which people hold an equal capacity to participate in and benefit from economic, political, and social opportunities regardless of race, ethnicity, religion, language, gender, or other attributes, and where, as a consequence, relationships between the groups are peaceful. Our review centers on four themes around which economic research addresses concepts outlined by the Club de Madrid: the effects of trust and social cohesion on growth and output, the effect of institutions on development, the costs of fractionalization, and research on the policies of social inclusion around the world.
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Working Paper No. 754 | February 2013
Growth Trends and Cycles in the American Postwar Period, with Implications for Policy
View More View LessDo all types of demand have the same effect on output? To answer this question, I estimate a cointegrated vector autoregressive (VAR) model of consumption, investment, and government spending on US data, 1955–2007. I find that: (1) economic growth can be decomposed into a short-run (transitory) cycle gravitating around a long-run (permanent) trend made of consumption shocks and government spending; (2) the estimated fluctuations are investment dominated, they coincide remarkably with the business cycle, and they are highly correlated with capacity utilization in both labor and capital; and (3) the long-run multipliers point to a large induced-investment phenomenon and to a smaller, but still significantly positive, government spending multiplier, around 1.5. The results cover a lot of theoretical ground: Paul Samuelson’s accelerator principle, John Kenneth Galbraith’s stress on consumption and government spending, Jan Tinbergen's investment-driven business cycle, and Robert Eisner’s inquiries on the investment function. The results are particularly useful to distinguish between economic policies for the short and long runs, albeit no attempt is made at this point to inquire into the effectiveness of specific economic policies.
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Working Paper No. 511 | August 2007
Monetary Policy, Inflation, Unemployment, Inequality—and Presidential Politics
Using a VAR model of the American economy from 1984 to 2003, we find that, contrary to official claims, the Federal Reserve does not target inflation or react to “inflation signals.” Rather, the Fed reacts to the very “real” signal sent by unemployment, in a way that suggests that a baseless fear of full employment is a principal force behind monetary policy. Tests of variations in the workings of a Taylor Rule, using dummy variable regressions, on data going back to 1969 suggest that after 1983 the Federal Reserve largely ceased reacting to inflation or high unemployment, but continued to react when unemployment fell “too low.” Further, we find that monetary policy (measured by the yield curve) has significant causal impact on pay inequality—a domain where the Fed refuses responsibility. Finally, we test whether Federal Reserve policy has exhibited a pattern of partisan bias in presidential election years, with results that suggest the presence of such bias, after controlling for the effects of inflation and unemployment.
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