+3 votes
asked ago in General Economics Questions by (930 points)
Has the fall in labor share affected inflation potential, aggregate demand, net social benefits from economy or interest rates?

3 Answers

0 votes
answered ago by (210 points)
This is a great question. You more often see the labor share as a dependent variable (i.e. what affect do interventions have on labor's share). There have been some efforts to use the labor share as a measure of the output gap (Woodford, The Taylor Rule and Optimal Monetary Policy), but that doesn't really get at what you describe—a structural change in the labor share altering macro aggregates.

This from Dietrich Vollrath points out that a decline in the labor share could lead to TFP growth overstating actual technological gains, which could conceivably cause the central bank to be too lenient (https://growthecon.com/blog/Cake/).
commented ago by (610 points)
Part of the view is the that labor share goes to "workers" and the capital share to "capitalists". If the you think of the latter group as mostly the top 1% and the former as everyone, you can see a lower labor-share will be related to higher inequality. This is also true if you look at the Piketty and Saez work and see much of the income of the top 1% and higher percentiles is dividends and capital gains.
0 votes
answered ago by (190 points)
The decline in the labor share may be one of the mechanisms through which hysteresis (demand shocks causing supply side effects) works.  In other words, it is responsible for a lower employment rate.  Here is a model designed to be accessible to students and a general audience:  


A working paper version is here:

0 votes
answered ago by (180 points)
The first question is fallen as a share of what and from when?  Some research has taken labor income as a share of GDP or profits as a share of GDP and that is simply the wrong denominator.  To keep the capital stock intact, some output has to go to replacing depreciated capital so it is very important to subtract depreciation from the denominator and look at labor compensation as a share of national income or net national product.   In the 1950s depreciation averaged 11.8% of GDP but over the last 10 years it has averaged 16.0%.  We now buy shorter-lived assets that depreciate faster.  The second question is fallen since when?  The labor share of national income averaged 62.1% over the last four quarters.  This is exactly the same share as the 15 years that ended 1965 Q4.  Those 15 years saw an average CPI inflation rate of 1.5%,, an average unemployment rate of 4.9%, and an average real GDP growth rate of 4.0%.  I doubt anyone could say that this was a bad economic outcome.  Over the next 25 years the labor compensation share of US GDP averaged 65.5%.  Inflation over these 25 years averaged 5.9%, the unemployment rate averaged 6.2% and real GDP growth was 3.1% (respectable but well below 4.0%).  The 1950s and early 60s were, therefore, a relatively low labor share economy with booming growth and very subdued inflation.  The current environment has a similar labor share and until recently low inflation but growth has been barely above 2% (until the last couple of quarters).  The difference between the two periods is productivity growth and I am not sure that the labor share should be an independent variable in any economic model.  The economy grinds out prices and wage rates and employment and production and the labor share of national income is a derived variable.  It is a cyclical variable and as the labor share of income rises (the profit share falls), we are typically near the end of the expansion and the labor share typically peaks during the recession.
commented ago by (210 points)
Any recommended reading on these themes?
commented ago by (180 points)
The focus of much of the writings I have seen is about the decline in the labor share compared to the 80s and 90s.  I have not seen anything on comparing the labor share to the 50s and early 60s. but I think this is an important perspective to be explored.  I have published research for our clients on the decline in the profit share as a predictor/driver of recessions but this is a cyclical theme as opposed to a secular one.