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Labor Share and Inequality - September 4, 2018

CELEBRATING LABOR

This past Monday was Labor Day in the United States, a federal holiday, which, according to the U.S. Department of Labor, is “dedicated to the social and economic achievements of American workers” and “constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.”

The question for economists is then, how is labor doing? According to the Cleveland Fed’s recent commentary on the Labor Share, not too hot. In addition to the fact that “the labor share has declined over the last 20 years”, workers in U.S. manufacturing have suffered more than their developed market counterparts where “the average labor share... actually increased slightly over the period 1997-2015”. Trumps calls for more manufacturing jobs, may not be too off base though as Manufacturing Jobs and Employee Compensation as a percentage of GDP appear to move similarly.

U.S. workers in service jobs have also seen their compensation decrease as a percent of output while service workers in other developed countries have seen their compensation increase. The report’s authors also cite the decline in the relative price of investment goods as cause for a reduction in the labor share, with the U.S. once again seeing a significantly larger decline.

INEQUALITY DYNAMICS

The Minneapolis Fed also took a look at the little guy, publishing a working paper on Income and Inequality. Using newly compiled data to form a Historical Survey of Consumer Finances, the authors confirm previous research that found a trend toward increasing polarization of income and wealth since the 1970s. As part of their findings, they note a “systematic and highly persistent difference in portfolio composition and leverage of households along the wealth distribution.” Central to this tendency is that middle-class America is “highly sensitive to fluctuations in real estate prices”. Consequently, since the financial crisis, though “income distribution ... changed only modestly”, “this decade has witnessed the largest increase in wealth inequality in postwar history”.

“Essentially, the quick recovery of the stock market boosted wealth at the top, while the middle class took much longer to recover from the substantial drop in wealth during the crisis.”

However, for the bottom 50%, the picture remains dire: they have not benefitted from the bull market as “Financial assets play a minor role in bottom 50% portfolios, and ominously, on the liability side of their ledgers, “the bottom 50% also have a high share of non-housing debt” and “In recent years, education loans make up a growing share of this debt.”