Income distribution and economic activity: A frequency domain causal exploration

Abstract

This paper contributes to the empirical literature on the Goodwin pattern. Building on the frequency domain representation of SVAR models, we calculate the extended partial directed coherence. This measure captures the contemporaneous effect from labor share onto economic activity. We illustrate the method with simulated data. Results for two-dimensional models with quarterly US data (1947Q1–2020Q1) between activity proxies (employment rate and output gap) and labor share indicate causal bi-directional relationships for short and medium run. We estimate an extended model in employment rate, output gap, and labor share, and sub-samples describing golden age and great moderation separately. Results indicate that the mechanisms underlying the Goodwin pattern have weakened in recent decades.