List of References
Lipschitz, Leslie, and McDonald Donough, 1991, “Real Exchange Rates and Competitiveness: A Clarification of Concepts and Some Measurements for Europe,” International Monetary Fund, Working Paper No. 91/25.
Rotemberg, Julio, and Woodford Michael, 1999, “The Cyclical Behavior of Prices and Costs,” Cambridge: National Bureau of Economic Research, Working Paper No. 6909,
Staiger, Douglas, Stock James, and Watson Mark, 1996, “How Precise are Estimates of the Natural Rate of Unemployment?” National Bureau of Economic Research Working Paper 5477, March.
Prepared by Stephen Tokarick, Jorge Chan-Lau, and Gustavo Ramirez.
The current business cycle is defined to be the period from March 1991 to the present, while the previous business cycle is taken to be the period from November 1982 through July 1990. These business cycle dates are taken from definitions adopted by the National Bureau of Economic Research (NBER), The beginning date of each cycle refers to the trough of the cycle. The figures used in the paper depict the behavior of each labor-market indicator six quarters prior to the trough of the cycle and 32 quarters after the trough.
See U.S. Department of Labor (1998). Data on health insurance costs were obtained from unpublished estimates of the Bureau of Labor Statistics.
The last five business cycles and the average value of labor’s share over the cycle was: November 1970 to November 1973 (74.2); March 1975 to January 1980 (73.1); July 1980 to July 1981 (73.7); November 1982 to July 1990 (72.5); and the current cycle (71.7).
Lipschitz and McDonald (1991) propose, in a different context, that comparing labor shares in value added across trading partners yields useful information about price competitiveness. They propose using a profit-based indicator of competitiveness based on real unit labor costs, i.e., labor’s share in valued added.
Hogan (1998) found that adding the change in real unit labor costs to a standard Phillipscurve equation did not improve the predictive power of the equation.
For example, on the unemployment gap variable, Hogan (1998) obtains a coefficient of about 0.26 and Staiger, Stock, and Watson (1996) obtain a coefficient between 0.22 and 0.41, depending on the specification.
Gali and Gertler (1998) also find that a decline in real marginal costs of production, as exhibited by a decline in labor’s share, has a significant impact on inflation.
On average, lagged inflation accounted for 104 percent of forecast inflation, the change in import prices accounted for -8 percent, the change in the labor share accounted for 1.9 percent, and the unemployment gap accounted for 1.7 percent.