Fed: Political Distribution Risk and Aggregate Fluctuations

This is the best tl;dr I could make, original reduced by 93%. (I'm a bot)

Wages fall if the former shock occurs, but increase if the latter shock hits the economy.

The half-life of 34 quarters is based on our reading of the changes in political climate regarding the bargaining power of workers in the post-war U.S. and matches the average duration of control of the different branches of the federal government by each party after World War II. As a robustness check, we explore the behavior of the model with even more persistent bargaining shocks and with less persistent ones.

To assess the business cycle properties of our model, we compare it with a version of our model without bargaining shocks, with a benchmark real business cycle model with productivity shocks, and with an RBC model augmented with factor share shocks in the production function.

An RBC model with factor share shocks yields wages that are too pro-cyclical: a shock toward labor makes it more productive and, thus, raises wages.

We document, for example, how after a bargaining shock that redistributes in favor of workers, output, employment, and firm valuation drop and how trying to endogenize the bargaining shocks to make them dependent on the business cycle does not affect our main results.

Our bargaining shocks resemble wage markup shocks such as those in Gal´ı et al.

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