Professor Miguel Leon-Ledesma

The Missing Link: Monetary Policy and The Labor Share

by Cristiano Cantore, University of Surrey; Filippo Ferroni, Federal Reserve Bank of Chicago; and Miguel A. León-Ledesma, University of Kent. Discussion paper KDPE 1808, June 2018.

Non-technical summary:

The mechanisms through which monetary policy (MP) affects inflation and real economic activity are central to macroeconomics. During the past few decades, New Keynesian models have constituted the dominant view of that transmission mechanism. In those models, MP affects inflation and real economic activity through the effect of interest rate changes on firms’ mark-ups over marginal costs of production. Changes in mark-ups have a redistributive effect between labour and profits. The essence of that mechanism in its simplest version is as follows: when prices cannot adjust immediately, a monetary policy contraction that reduces demand implies that prices are too high relative to optimal because firms cannot lower prices to adjust to the fall in demand; since prices are above optimal, firms are charging a higher mark-up after the contractionary MP surprise. Since mark-ups rise, the labour share of income falls and the profit share (mark-ups) increases. Thus, we would expect that, after a MP contraction, cyclically, the labour share would fall.

In this paper we provide comprehensive evidence on the effect of MP surprises on the labour share for five developed countries (Australia, Canada, EU, US, and the UK) using state of the art econometric techniques. Contrary to the expected result from the basic New Keynesian model, we find that, systematically, the labour share increases cyclically after a MP contraction. This fact is robust to different countries, measures of the labour share, sample periods, econometric model specifications, shock identification methods, and sectors. The reason why the labour share increases is because real wages fall but labour productivity falls more than real wages. Since the labour share is simply the ratio of the two, it increases after a contractionary MP surprise.

We then ask whether macroeconomic models widely used to analyse the effect of MP on the economy are well equipped to reproduce that response. In more elaborate versions of the New Keynesian model that incorporate different real and nominal rigidities in the economy, the direct relationship between mark-ups and the labour share breaks down. Hence, potentially, these models can generate a response of the labour share in line with our data findings.

We analyse models incorporating a cost channel of MP, fixed costs of production, different production functions, and search and matching frictions in the labour market. The models are analysed numerically allowing for a wide range of behavioural and market structure parameter combinations. Our analysis shows that, even in these more elaborate versions, the models fail to reproduce the increase in the labour share after a MP contraction that we observe in the data.

You can download the complete paper here.

Technology key to making food origin labels useful

Any move to force food producers to provide information on the origin of ingredients in products will require the use of technology to help consumers use and benefit from this information, according to research.

In a new paper Professor Iain Fraser, from the University’s School of Economics, examined the potential for mandatory country of origin labelling (COOL) information and how it could be best implemented.

Currently only a small number of products in the European Union legally require COOL information, such as for wine, eggs, beef and fruit and vegetables. For beef, this labelling must also differentiate between place of birth and where it is reared and slaughtered.

Many consumers say they like such information and prior research by Professor Fraser has found that UK shoppers are willing to pay more for meat with a UK COOL label, especially since the horse meat scandal of 2013.

However, there is often confusion about what the information refers to – such as meat products that don’t specify where the animal was raised as opposed to where it was slaughtered. Bacon, for example, can be cured in the UK but come from Danish pigs and be presented as from the UK, or vice versa and both would be legal.

The EU is in discussions to require COOL information as a mandatory requirement for almost all foodstuffs. This could have potentially huge ramifications for both producers and consumers, particularly in how best to present this information in a usable, trustworthy manner.

Professor Fraser notes that technologies such as blockchain and SmartLabels are among the ways in which consumers could receive information on packaging detailing the location from which an item has come.

The use of these technologies in this way already exists in a few examples, such as within Australia, or Switzerland, but have the potential to become more widespread if required, or consumers demand, more information on the origins of food products.

The paper adds that it may become the case that consumers can use a smartphone app to scan food in store, or set their preferences when shopping online, to seek out food with specific COOL data so that they can make the access to this data as useful as possible to their own needs.

The paper, entitled Wrapped in the Flag: Food Choice and Country of Origin Labelling, has been published in EuroChoices.


Original article by Dan Worth, University of Kent Press Office

Effects of population ageing

The School’s Dr Katsuyuki Shibayama (Principal Investigator), Professor Miguel León-Ledesma, and Dr Keisuke Otsu (Keio University and Honorary Lecturer at Kent) have received funding from the Murata Foundation in Japan for 2 million Yen for a project entitled: A quantitative analysis of population ageing on economic growth and income inequality.

The project aims at understanding the consequences of population ageing for the joint dynamics of growth and income distribution. Its objective is to construct a model of overlapping generations where families choose the number of children and their level of education. The model will then be used to analyse the effect of different “anti-ageing” policies on growth and income distribution, namely: female employment support, child-care support, and higher education subsidies.

The model is targeted to reproduce the case of the Japanese economy, one of the more rapidly ageing societies, but will also draw implications for other economies expected to go through a similar demographic experience. The project also consolidates the close links between Kent and Keio, who currently have a student exchange agreement.

Dr Penélope Pacheco-López contributes to recent UNIDO publication

Dr Penélope Pacheco-López, Associate Lecturer in Economics, has made a major contribution to a recent UNIDO publication on Structural Change for Inclusive and Sustainable Industrial Development. She wrote three chapters “Manufacturing and Economic Development: An Introduction”, “Patterns of Manufacturing Development” and “Inclusive Manufacturing Development”. The publication is accessible at

Dr Adelina Gschwandtner

Vice chancellor salary study demolishes claims that pay rises are based on performance

Research by the School’s Dr Adelina Gschwandtner and Richard McManus, Canterbury Christ Church University, was covered in The Telegraph on 6 June 2018, by Charles Hymas:

“The most comprehensive study into university vice-chancellors’ pay has demolished their claims that their huge rises are based on performance.

Economists have shown that instead it is the vice-chancellor equivalent of “keeping up with the Jones’s” as the lower-paid race to close the gap with the best-paid university bosses.”

Read the complete article here:


William Knight wins Kent Student Award

The School of Economics is delighted to announce that final year student William Knight has been awarded a Kent Student Award for his outstanding contribution to fundraising. William has been a dedicated RaG Treasurer, fundraising and raising awareness for men’s mental health. He was presented his award on Friday 1 June at the 2018 Kent Student Awards Gala Dinner. The School of Economics would like to congratulate William for this fantastic achievement.

Cyber Security: How safe is your business?

The University of Kent’s School of Economics, School of Computing and Kent Business School, in partnership with the Federation of Small Businesses, invites you to a Business Soundbites event titled Cyber Security: How safe is your business? on Thursday 7 June from 17:00 onwards.

Details and registration at

Cyber security is essential for organisations of all sizes. Government figures suggests that around half of all organisations suffer some form of cyber breach or attack in any one year. The consequences of this can be considerable, including significant financial costs and loss of customers.

Consistent evidence suggests, however, that many organisations are not treating cyber security as seriously as they should. This is a particular issue for SMEs, who are an attractive target for criminals, but may feel they lack the expertise and resource to implement an effective cyber-strategy. There are, though, simple, cheap and effective strategies that organisations can implement to reduce the potential damage from attack. There is also a range of support and advice from which organisations can benefit.

This event will inform and advise SMEs about cyber security. The event will cover:

  • Information on the most prevalent threats and trends in cyber security
  • How threats will likely evolve in the future.
  • Why cyber security matters to SMEs.
  • Actions that SMEs can take to mitigate threats and become more informed.
  • Actions that SMEs should take in the event of a cyber-attack.

The School of Economics and School of Computing are working together on an ESRC-funded project on cyber security and SMEs, and are keen to talk to SMEs about their experience in this field.

SMEs who are available to take part in a short survey on cyber security will receive a FREE cyber security healthcheck from the Kent IT Consultancy, the School of Computing’s student-staffed IT Consultancy. To register for the survey and consultancy, please contact the KITC via email:

Dr Adelina Gschwandtner

University vice-chancellor pay, performance and (asymmetric) benchmarking

by Adelina Gschwandtner, University of Kent, and Richard McManus, Canterbury Christ Church University. Discussion paper KDPE 1807, May 2018.

Non-technical summary:

The pay of university vice-chancellors (VC) in the UK has caused a strong debate in the press recently leading to some VCs having to resign.

Academics protest that at a difficult time for UK academia caused by the insecurity faced in the outset of Brexit, the gap between VC and staff pay is increasing. Students claim that at a time when tuition fees are increasing and they are accumulating high levels of debt the increase in VC’s pay is unacceptable. Remuneration committees of universities however, argue that the increase is justified giving the VCs outstanding performance, especially during these turbulent

The present study analyses the relationship between performance and pay using established econometric models and ample empirical evidence from UK academia. It uses a dataset consisting of 154 universities in the UK over a period of ten years and a comprehensive set of key performance indicators related to both student numbers and student evaluations of the university (league tables) as well as its research and funding performance.

The key result of the study is that even though there is a correlation between pay and performance it is not causal and therefore, a better performance of the VCs is not what causes a higher pay. It is much rather a benchmarking behaviour where those universities with below average pay increase their VC pay quicker than those with above average pay.

‘Keeping up with VC Jones’ is what seems to explain the recent inflation of VC pay, rather than their good performance.

You can download the complete paper here.

Prof Nizar Allouch

Constrained public goods in networks

by Nizar Allouch, University of Kent, and Maia King, University of Oxford. Discussion paper KDPE 1806, May 2018.

Non-technical summary:

Voluntary contributions account for the provision of many public goods, ranging from essential infrastructure, education, to health care, while at the aggregate level charitable giving represents a significant proportion of GDP in many countries. The seminal contribution of Bergstrom, Blume, and Varian (1986), built on an earlier striking result by Warr (1981), provides a rigorous investigation of the standard model of private provision of pure public goods.

Recent work on public goods in networks, initiated by the key paper of Bramoullé and Kranton (2007), has many interesting facets and applications. The technology of network analysis allows us to generalise from the provision of pure public goods, which benefit all agents, to a more detailed model of local public goods with a heterogeneous benefit structure shaped by a network.

This paper analyses the private provision of public goods where agents interact within a fixed network structure and may benefit only from their direct neighbours’ provisions. We survey the literature and then generalise the public goods in networks model of Bramoullé and Kranton (2007) to allow for constrained provision. In so doing, we show that, any network supports a Nash equilibrium with no intermediate contributors.

You can download the complete paper here.

SMEs invited to take part in a cyber-security survey and health check

The School of Economics and School of Computing are working together on an EPSRC-funded project on cyber security. As part of the project they and are keen to talk to SMEs about their experience in this field.

SMEs who are available to take part in a short survey on cyber security will receive a FREE cyber security health check from the Kent IT Consultancy, the School of Computing’s student-staffed IT Consultancy. In the health check you will be walked through the Cyber Essentials Scheme and given personalized feedback on steps your business can take to improve cyber security.

The survey and health check will take around 60-90 minutes. Places will be offered on a first-come-first-served basis and so please book early.

To register for the survey and consultancy, please contact the KITC via email:

For more information on the research project go to