Mark-ups, labor market inequality, and the distributional implications of monetary policy

Grant Type: academic

Grant Year: 2020

Grant Amount: $60,000

Grant description:

This project is part of a broader agenda to develop quantitative macroeconomic models that can be used to study the distributional implications of macroeconomic shocks and policies. Existing macroeconomic models are limited in their ability to create realistic dynamics in the distribution of labor income in response to macroeconomic shocks. Since labor income is one of the most important dimensions of economic inequality and the most important determinant of economic welfare for the majority of U.S. households, this is a significant limitation.

This paper will begin by developing a theory to demonstrate the new heterogeneity that is going to be a key force in the model. It will be followed by an empirical section to show the fact that the model is seeking to address and to highlight the important empirical facts that other models are missing, such as that not all labor income is similarly cyclical and that expansionary and productive occupations have systematically different experiences. The final section addresses the general equilibrium consequences of this heterogeneity, a step that is critically important for doing policy counterfactuals.

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