Events at CERGE-EI

Elisa Rubbo, Ph.D.

Booth School of Business at the University of Chicago, United States

Abstract: This paper models the incidence of aggregate demand shocks on relative labor income across households. Incidence patterns are central to policy debates and to aggregate monetary transmission. Building on a New Keynesian framework with multiple industries and segmented factor markets, I find that labor income responses follow a Phillips curve logic. Workers and industries facing more nominal rigidity or more elastic factor supply exhibit larger employment responses and smaller price responses to aggregate demand. The model rationalizes several empirical patterns. Low-income occupations face stronger employment cyclicality through more elastic labor supply, while high-income occupations face stronger earnings cyclicality through more flexible compensation. When properly accounting for capital-skill complementarities, the model generates a U-shaped incidence across the wage distribution. The development of new technologies that substitute mid-skill occupations would reverse the incidence profile, dampening aggregate monetary transmission.

Full Text: A Theory of Worker Betas: Aggregate Demand Incidence across the Labor Income Distribution