The Economic Volatility Effect of Income Instability Shocks and Coordinated Policy Regulation
ZHANG Mengting, SI Dengkui, SHI Kuiran, WANG Guihu
School of Finance, Nanjing Audit University; School of Economics, Qingdao University; Institute of Finance & Banking, Chinese Academy of Social Sciences
Summary:
The once-in-a-century global changes are accelerating evolution,and instability and uncertainty have increased significantly. These changes not only alter firms' relative use of employment intensity of capital versus labor factors, but also easily trigger firms to reduce labor inputs and lower the labor income share to achieve short-term operational sustainability, with labor income uncertainty rising accordingly. Moreover, the growing instability of labor income not only hinders China's economic transformation and upgrading but also poses challenges to achieving common prosperity. The 2025 Government Work Report underscores the importance of various channels to boost household incomes, supporting income growth and alleviate the burden on middle-and low-income groups, and improving the regular wage growth mechanism for workers. Establishing a stable labor income growth mechanism is thus not only a critical step toward achieving common prosperity but also vital for optimizing income distribution and advancing high-quality development in the real economy. To identify the driving factors of labor income instability and prevent their adverse macroeconomic impacts, this paper constructs a systematic framework to address such issue. Specifically, we construct a New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model with heterogeneous multi-sectors to identify key factors causing labor income instability, examine their dynamic effects and term structure characteristics, thereby clarifying the dynamic feedback mechanism between labor income instability and economic fluctuations. In addition, we examine effective fiscal-monetary policy combinations to establish a long-term mechanism for sustained and stable income growth through policy simulations that consider both counter-cyclical and cross-cyclical regulatory approached. We find that labor supply-demand mismatches, as well as skill mismatches, constitute primary drivers of labor income instability. Simultaneously, the labor income instability exerts adverse effects on aggregate demand and inflation, which exhibit both dynamic persistence and prolonged duration. In particular, the impact of labor income instability on macroeconomic fluctuations manifests a clear term structure, demonstrating relatively stronger effects in the short and medium term. Furthermore, the coordinated fiscal-monetary policies, which considers output and inflation targets, uses counter-cyclical and cross-cyclical regulation to reduce labor income instability and prevent the negative impact on macroeconomics. However, residual economic risks persist even under coordinated fiscal and monetary policy rules, necessitating the incorporation of regulatory policy measures to achieve the dual objectives of stabilizing growth and containing systemic risks. This paper makes three marginal contributions. First, we construct a NK-DSGE model with heterogeneous multiple sectors, incorporating multiple sources of shocks and various frictions to identify potential driving factors of labor income instability. Meanwhile, we characterize the dynamic feedback mechanism between labor income instability and macroeconomic fluctuations, elucidating the generation mechanism and specific channels of economic impact. This provides evidence for understanding how labor income instability affects China's macroeconomic fluctuations and optimizing the policy regulation framework. Second, we reveal the nonlinear and structural characteristics of labor income instability across heterogeneous groups and clarify the transmission channels affecting macroeconomic fluctuations. From a group differences perspective, we explore labor income fluctuation characteristics and economic effects, particularly explaining the evolutionary mechanism and economic consequences through labor supply-demand and skill matching market frictions. This provides new insights for identifying influencing factors and establishing dynamic governance mechanisms for income instability. Third, we explore policy synergies across different policy types through counter-cyclical and cross-cyclical policy experiments targeting heterogeneous regulatory objectives. We propose a coordinated mechanism integrating counter-cyclical and cross-cyclical adjustments in aggregate and structural dimensions for fiscal and monetary policies. We provide feasible solutions to reduce labor income instability and mitigate its adverse macroeconomic impacts by establishing policy combination rules targeting aggregate demand and inflation objectives and using welfare analysis to evaluate their effectiveness and match implementation scenarios.
张梦婷, 司登奎, 石岿然, 王桂虎. 收入不稳定冲击的经济波动效应与政策协同调控[J]. 金融研究, 2025, 543(9): 1-19.
ZHANG Mengting, SI Dengkui, SHI Kuiran, WANG Guihu. The Economic Volatility Effect of Income Instability Shocks and Coordinated Policy Regulation. Journal of Financial Research, 2025, 543(9): 1-19.
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