Monetary policy, market structure and the income shares in the U.S.

Abstract

This paper investigates whether the monetary policy and the market structure have anything to do with the declining share of labor in the U.S in recent decades. For this purpose: (a) a dynamicgeneral equilibrium model is constructed and used in conjunction with data over the2000-2014 period to compute the income shares; (b) the latter are compared to those reportedfrom various sources for significant differences, and (c) the influence of monetary policy issubjected to several statistical tests. With comfortable margins of confidence it is found thatthe interest rate the Federal Open Market Committee charges for providing liquidity to theeconomy is related positively with the shares of labor and profits and negatively with the shareof interest. What these findings imply is that, by moving opposite to the equilibrium real interestrate, the relentless reduction of the federal funds rate since the 1980s may have contributed tothe decline in the equilibrium share of labor, whereas the division of the equilibrium non-laborincome between interest and profits has been evolving in favor of the former, because accordingto all indications the stock of producers’ goods in the U.S has been aging. As for the marketstructure, it is found that even if firms had and attempted to exercise monopoly power, it wouldbe exceedingly difficult to exploit it because the demand of consumers’ goods is significantlyprice elastic. Should these results be confirmed by further research, they would go a long waytowards explaining the deceleration of investment and economic growth.