The Fed shouldn’t give up on restoring labor’s share of income—and measure it correctly

U.S. workers’ wages have climbed modestly but noticeably over the past year. EPI’s nominal wage tracker shows that in 2015 and 2016, this growth averaged 2.4 percent, in 2017 it averaged 2.5 percent, but in 2018 it accelerated to 2.85 percent—and it surpassed 3 percent growth in the last quarter of the year. This uptick has been long-coming and it took a longer spell of low unemployment to spur it than most would have thought.

3 percent growth for a quarter, however, should not constitute “mission accomplished” in the minds of macroeconomic policymakers like the Federal Reserve. In the long run, nominal wage growth should run at a rate equal to the Fed’s inflation target (2 percent) plus the long-trend growth in potential productivity (let’s call this 1.5 percent).1 This indicates that even the recent accelerations in wage growth leave us failing to meet these long-run goals.

Even more importantly, wage growth should run substantially above these long-run targets for a spell of time after long periods of labor market slack. The arithmetic reasoning for this is straightforward: any time wage growth runs slower than current rates of inflation plus productivity, the result will be labor compensation shrinking as a share of the economy. The economic intuition is simply that extended periods of labor market slack sap workers’ ability to secure wage increases from employers.

This undermining of labor’s leverage shows up clearly in the data. EPI’s nominal wage tracker, besides charting wage growth over time, also tracks a measure of labor’s share of income, precisely to highlight the accumulated shortfall of labor income that policymakers should aim to restore.

Figure A

Labor’s share of income remains far from recovered: Share of corporate-sector income received by workers over recent business cycles, 1979–2018

Labor Share
Jan-1979 79.0%
Apr-1979 79.5%
Jul-1979 80.2%
Oct-1979 80.8%
Jan-1980 81.2%
Apr-1980 82.7%
Jul-1980 81.9%
Oct-1980 80.6%
Jan-1981 80.3%
Apr-1981 80.4%
Jul-1981 79.6%
Oct-1981 80.5%
Jan-1982 81.6%
Apr-1982 81.0%
Jul-1982 81.0%
Oct-1982 81.4%
Jan-1983 81.0%
Apr-1983 79.9%
Jul-1983 79.4%
Oct-1983 79.1%
Jan-1984 77.8%
Apr-1984 78.0%
Jul-1984 78.5%
Oct-1984 78.3%
Jan-1985 78.4%
Apr-1985 78.6%
Jul-1985 78.2%
Oct-1985 79.6%
Jan-1986 79.9%
Apr-1986 80.8%
Jul-1986 81.5%
Oct-1986 81.8%
Jan-1987 81.7%
Apr-1987 80.9%
Jul-1987 80.4%
Oct-1987 80.9%
Jan-1988 80.9%
Apr-1988 80.9%
Jul-1988 80.8%
Oct-1988 80.2%
Jan-1989 80.6%
Apr-1989 80.9%
Jul-1989 80.9%
Oct-1989 81.9%
Jan-1990 81.8%
Apr-1990 81.6%
Jul-1990 82.7%
Oct-1990 83.1%
Jan-1991 82.2%
Apr-1991 82.5%
Jul-1991 82.8%
Oct-1991 83.3%
Jan-1992 83.0%
Apr-1992 83.1%
Jul-1992 83.6%
Oct-1992 83.0%
Jan-1993 83.5%
Apr-1993 82.7%
Jul-1993 82.7%
Oct-1993 81.4%
Jan-1994 81.4%
Apr-1994 81.3%
Jul-1994 80.6%
Oct-1994 80.3%
Jan-1995 80.6%
Apr-1995 80.4%
Jul-1995 79.5%
Oct-1995 79.7%
Jan-1996 79.1%
Apr-1996 79.1%
Jul-1996 79.2%
Oct-1996 79.3%
Jan-1997 79.0%
Apr-1997 78.9%
Jul-1997 78.3%
Oct-1997 78.5%
Jan-1998 79.9%
Apr-1998 79.9%
Jul-1998 79.8%
Oct-1998 80.4%
Jan-1999 80.3%
Apr-1999 80.6%
Jul-1999 81.0%
Oct-1999 81.4%
Jan-2000 81.8%
Apr-2000 81.9%
Jul-2000 82.4%
Oct-2000 83.1%
Jan-2001 83.1%
Apr-2001 82.8%
Jul-2001 83.0%
Oct-2001 84.0%
Jan-2002 82.0%
Apr-2002 81.8%
Jul-2002 81.8%
Oct-2002 80.9%
Jan-2003 80.3%
Apr-2003 80.1%
Jul-2003 79.8%
Oct-2003 79.9%
Jan-2004 78.8%
Apr-2004 78.7%
Jul-2004 78.6%
Oct-2004 78.5%
Jan-2005 77.0%
Apr-2005 76.9%
Jul-2005 77.2%
Oct-2005 76.0%
Jan-2006 75.5%
Apr-2006 75.4%
Jul-2006 74.7%
Oct-2006 76.1%
Jan-2007 77.3%
Apr-2007 76.9%
Jul-2007 78.3%
Oct-2007 79.4%
Jan-2008 79.8%
Apr-2008 79.7%
Jul-2008 80.1%
Oct-2008 83.7%
Jan-2009 79.8%
Apr-2009 79.4%
Jul-2009 78.4%
Oct-2009 77.4%
Jan-2010 76.4%
Apr-2010 76.7%
Jul-2010 74.9%
Oct-2010 74.9%
Jan-2011 77.1%
Apr-2011 76.0%
Jul-2011 76.0%
Oct-2011 74.2%
Jan-2012 74.6%
Apr-2012 74.2%
Jul-2012 73.9%
Oct-2012 74.6%
Jan-2013 74.0%
Apr-2013 73.6%
Jul-2013 73.5%
Oct-2013 73.8%
Jan-2014 75.9%
Apr-2014 74.5%
Jul-2014 73.6%
Oct-2014 74.2%
Jan-2015 74.2%
Apr-2015 74.4%
Jul-2015 75.0%
Oct-2015 75.6%
Jan-2016 75.5%
Apr-2016 75.4%
Jul-2016 75.4%
Oct-2016 75.6%
Jan-2017 76.1%
Apr-2017 75.8%
Jul-2017 76.3%
Oct-2017 76.3%
Jan-2018 76.2%
Apr-2018 76.0%
ChartData Download data

The data below can be saved or copied directly into Excel.

Note: Shaded areas denote recessions. Federal Reserve banks' corporate profits were netted out in the calculation of labor share.

Source: EPI analysis of Bureau of Economic Analysis National Income and Product Accounts (Tables 1.14 and 6.16D)

Copy the code below to embed this chart on your website.

Measuring the labor share correctly

We think tracking labor’s share of income is crucial for policymakers, and that this figure contains lots of interesting insights about macroeconomic dynamics. Before we delve into these insights, however, we should first note that our measure above is not the only way to measure labor’s share of income. In particular, a measure obtained directly from the Bureau of Labor Statistics (BLS) productivity series is often referenced. This measure—reproduced below and shown side-by-side with our preferred measure—shows some non-trivial differences in the labor share over time. Most strikingly, the BLS measure has a much stronger long-run downward trend than the measure we use.

Figure B

Two measures of labor’s share, 1947–2018

 

Date EPI labor share BLS labor share
1947Q1 105.8 116.4
1947Q2 103.2 114.8
1947Q3 104.0 116.6
1947Q4 103.6 115.0
1948Q1 101.3 115.2
1948Q2 100.1 115.1
1948Q3 101.5 115.1
1948Q4 100.5 114.2
1949Q1 101.3 114.5
1949Q2 102.6 114.7
1949Q3 101.2 112.6
1949Q4 103.6 113.2
1950Q1 101.8 111.9
1950Q2 100.0 112.6
1950Q3 98.4 111.1
1950Q4 97.3 111.4
1951Q1 99.1 110.8
1951Q2 100.1 112.1
1951Q3 100.1 110.2
1951Q4 99.7 111.2
1952Q1 101.8 111.7
1952Q2 103.1 112.6
1952Q3 103.6 113.3
1952Q4 102.2 113.0
1953Q1 102.2 113.2
1953Q2 103.1 113.5
1953Q3 103.8 113.8
1953Q4 108.0 115.2
1954Q1 106.2 115.6
1954Q2 105.3 114.8
1954Q3 104.1 113.8
1954Q4 102.6 113.1
1955Q1 100.3 111.2
1955Q2 100.3 111.4
1955Q3 101.0 111.8
1955Q4 101.1 112.1
1956Q1 102.7 114.2
1956Q2 103.2 115.1
1956Q3 103.7 115.4
1956Q4 103.9 115.4
1957Q1 103.6 114.4
1957Q2 104.4 115.4
1957Q3 105.0 114.7
1957Q4 106.6 115.5
1958Q1 108.9 116.8
1958Q2 107.9 115.4
1958Q3 106.3 115.3
1958Q4 104.2 113.3
1959Q1 103.5 113.8
1959Q2 102.3 113.4
1959Q3 104.8 113.4
1959Q4 105.1 114.3
1960Q1 104.1 114.0
1960Q2 105.9 116.3
1960Q3 106.2 115.8
1960Q4 107.0 117.5
1961Q1 107.5 116.9
1961Q2 105.9 115.3
1961Q3 105.1 114.1
1961Q4 103.8 113.9
1962Q1 103.9 113.4
1962Q2 104.5 114.2
1962Q3 104.1 113.0
1962Q4 103.6 113.2
1963Q1 103.7 113.4
1963Q2 102.9 113.1
1963Q3 102.8 111.5
1963Q4 102.8 112.2
1964Q1 101.9 110.9
1964Q2 102.2 111.2
1964Q3 102.2 110.9
1964Q4 102.7 112.5
1965Q1 100.9 111.0
1965Q2 100.8 111.0
1965Q3 100.8 109.5
1965Q4 100.2 108.8
1966Q1 99.9 108.9
1966Q2 101.0 110.3
1966Q3 101.9 110.6
1966Q4 102.0 110.2
1967Q1 102.7 110.2
1967Q2 103.1 111.0
1967Q3 103.4 111.0
1967Q4 103.1 111.1
1968Q1 103.7 110.4
1968Q2 103.4 110.0
1968Q3 103.7 111.0
1968Q4 103.8 111.9
1969Q1 104.4 111.3
1969Q2 105.5 112.7
1969Q3 106.5 113.5
1969Q4 107.8 115.1
1970Q1 109.7 115.5
1970Q2 108.8 114.0
1970Q3 109.0 113.5
1970Q4 109.9 114.0
1971Q1 107.8 111.8
1971Q2 107.9 111.8
1971Q3 107.6 111.2
1971Q4 107.3 112.6
1972Q1 107.2 112.5
1972Q2 107.4 111.2
1972Q3 107.0 111.4
1972Q4 106.4 111.8
1973Q1 106.4 111.6
1973Q2 107.4 111.8
1973Q3 107.8 113.4
1973Q4 107.7 113.7
1974Q1 109.0 114.0
1974Q2 109.1 113.2
1974Q3 109.9 114.2
1974Q4 110.3 112.9
1975Q1 109.8 111.8
1975Q2 108.1 110.7
1975Q3 105.9 109.6
1975Q4 106.0 109.7
1976Q1 105.1 108.9
1976Q2 106.1 108.7
1976Q3 106.5 109.2
1976Q4 107.2 109.2
1977Q1 106.8 109.1
1977Q2 105.2 109.1
1977Q3 104.3 108.6
1977Q4 105.2 110.0
1978Q1 106.8 111.6
1978Q2 104.6 109.3
1978Q3 104.9 109.2
1978Q4 104.9 109.0
1979Q1 106.4 111.1
1979Q2 107.0 110.7
1979Q3 108.1 111.0
1979Q4 108.8 111.8
1980Q1 109.4 111.5
1980Q2 111.4 112.5
1980Q3 110.3 113.2
1980Q4 108.6 112.6
1981Q1 108.2 110.2
1981Q2 108.3 111.3
1981Q3 107.2 110.4
1981Q4 108.3 111.4
1982Q1 109.7 113.4
1982Q2 108.9 112.9
1982Q3 109.0 113.0
1982Q4 109.8 112.5
1983Q1 109.0 111.7
1983Q2 107.6 109.9
1983Q3 107.0 108.4
1983Q4 106.4 108.4
1984Q1 104.8 109.0
1984Q2 105.0 108.5
1984Q3 105.7 108.7
1984Q4 105.5 108.9
1985Q1 105.7 108.7
1985Q2 106.0 108.7
1985Q3 105.6 108.2
1985Q4 107.4 109.5
1986Q1 107.9 109.2
1986Q2 109.0 109.5
1986Q3 110.0 110.3
1986Q4 110.4 111.6
1987Q1 110.3 111.9
1987Q2 109.2 111.4
1987Q3 108.6 111.6
1987Q4 109.3 111.5
1988Q1 109.4 112.3
1988Q2 109.3 112.3
1988Q3 109.1 112.1
1988Q4 108.3 111.4
1989Q1 108.9 111.1
1989Q2 109.2 109.8
1989Q3 109.3 109.5
1989Q4 110.6 110.5
1990Q1 110.4 110.5
1990Q2 110.2 110.8
1990Q3 111.7 111.0
1990Q4 112.3 112.0
1991Q1 111.0 111.3
1991Q2 111.3 111.0
1991Q3 111.8 110.6
1991Q4 112.4 111.2
1992Q1 111.9 111.6
1992Q2 112.2 111.3
1992Q3 112.8 111.0
1992Q4 112.0 110.1
1993Q1 112.6 109.5
1993Q2 111.6 110.3
1993Q3 111.5 109.6
1993Q4 109.8 109.3
1994Q1 109.8 108.0
1994Q2 109.6 108.3
1994Q3 108.8 108.2
1994Q4 108.4 107.4
1995Q1 108.8 107.5
1995Q2 108.4 107.4
1995Q3 107.3 107.7
1995Q4 107.5 107.7
1996Q1 106.7 107.8
1996Q2 106.7 107.4
1996Q3 106.9 107.4
1996Q4 107.0 107.4
1997Q1 106.5 108.2
1997Q2 106.4 107.3
1997Q3 105.5 107.1
1997Q4 105.9 108.2
1998Q1 107.4 109.3
1998Q2 107.8 110.0
1998Q3 107.7 110.0
1998Q4 108.5 109.9
1999Q1 108.3 110.1
1999Q2 108.6 110.0
1999Q3 109.2 109.6
1999Q4 109.7 109.6
2000Q1 110.3 113.3
2000Q2 110.4 110.8
2000Q3 111.0 112.4
2000Q4 112.0 111.4
2001Q1 112.1 113.9
2001Q2 111.6 111.8
2001Q3 111.8 111.4
2001Q4 113.2 110.8
2002Q1 110.7 108.9
2002Q2 110.4 109.2
2002Q3 110.3 108.7
2002Q4 108.9 108.7
2003Q1 108.4 107.8
2003Q2 108.1 108.2
2003Q3 107.6 107.1
2003Q4 107.7 107.3
2004Q1 106.2 106.4
2004Q2 106.0 106.9
2004Q3 105.9 107.5
2004Q4 105.7 106.5
2005Q1 103.8 105.2
2005Q2 103.6 105.2
2005Q3 103.8 104.7
2005Q4 102.2 104.4
2006Q1 101.7 105.1
2006Q2 101.6 104.4
2006Q3 100.7 104.4
2006Q4 102.4 105.3
2007Q1 104.2 106.7
2007Q2 103.6 105.6
2007Q3 105.2 104.5
2007Q4 106.6 104.7
2008Q1 107.2 106.3
2008Q2 107.3 104.8
2008Q3 107.7 104.7
2008Q4 112.8 106.2
2009Q1 107.6 102.3
2009Q2 107.2 103.3
2009Q3 105.8 102.3
2009Q4 104.4 101.3
2010Q1 102.9 99.7
2010Q2 103.4 100.1
2010Q3 100.8 99.8
2010Q4 100.9 99.5
2011Q1 103.7 101.6
2011Q2 102.1 100.1
2011Q3 102.2 100.5
2011Q4 99.8 98.2
2012Q1 99.3 99.7
2012Q2 99.6 99.3
2012Q3 100.0 99.2
2012Q4 101.1 101.8
2013Q1 100.5 99.5
2013Q2 100.8 100.3
2013Q3 101.0 99.1
2013Q4 100.5 98.4
2014Q1 102.2 101.2
2014Q2 99.9 99.0
2014Q3 98.8 98.2
2014Q4 99.4 99.7
2015Q1 99.9 100.4
2015Q2 100.2 100.2
2015Q3 101.0 100.2
2015Q4 101.7 100.8
2016Q1 101.6 100.9
2016Q2 101.5 100.0
2016Q3 101.5 99.9
2016Q4 101.8 100.3
2017Q1 102.5 101.0
2017Q2 102.1 100.7
2017Q3 102.7 100.9
2017Q4 102.7 100.7
2018Q1 102.6 101.1
2018Q2 102.1 99.5
2018Q3 101.3 99.4
ChartData Download data

The data below can be saved or copied directly into Excel.

Note: Shaded areas denote recessions. Federal Reserve banks' corporate profits were netted out in the EPI calculation of labor share. EPI labor share measure derived exactly as in Figure A above, but converted to an index with 2012 =100 for comparability with BLS measure.

Source: EPI labor measure is analysis of Bureau of Economic Analysis National Income and Product Accounts (Tables 1.14 and 6.16D). BLS NFB measure is from the U.S. Bureau of Labor Statistics Productivity and Costs (LPC) program, series # PRS85006173. BLS labor share measure retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/PRS85006173, January 24, 2019.

Copy the code below to embed this chart on your website.

What explains these differences? Three things: First, our measure examines labor’s share in the corporate sector only, while the labor share from the BLS productivity series looks at the broader non-farm business (NFB) sector. Second, our measure uses net, not gross, measures of income. So, our measure strips out depreciation from the income in the denominator of the labor share. Third, our measure strips out the profits of Federal Reserve banks. We think each of these decisions yields a better measure if you want a labor share indicator that sheds light on the relative bargaining strength of workers vis-a-vis employers—below we explain why.

First, we focus on the corporate sector rather than the total economy or even the NFB sector. We make this choice because in the corporate sector all income is either labor income or capital income. Since we are interested in using changes in the labor share as measures of relative bargaining strength between workers and employers, this clean distinction between incomes is useful. In the total economy, there are many income flows that do not necessarily tell us much about this relative bargaining strength. Rental incomes accruing to property-owners, for example, can come at the expense of both workers and their employers, and can in theory reflect land scarcity rather than anything profound about the current state of macroeconomic slack. Proprietor’s incomes are a mix of labor and capital incomes, and correctly apportioning which share of these should be chalked up to returns to labor versus capital is near-impossible. The corporate sector divides income cleanly into labor versus capital, and yet remains large enough (accounting for over 70 percent of the U.S. private sector) to provide generalizable findings.

Second, we focus on net measures of income that account for depreciation. Depreciation is the reduction in the value of assets that occurs through wear and tear or technological obsolescence. If income from current production is not used to reinvest and keep the value of the capital stock whole in the face of constant depreciation, this would lead to a smaller capital stock and reduced productivity over time. Hence, depreciation represents a claim on income that cannot boost the living standards of either workers or capital owners. Further, the share of depreciation in corporate sector value-added (as well as its share in total economy gross domestic product) has been rising steadily over time. The reason for this rise is well understood: information and communications technology equipment has been steadily rising as a share of the overall capital stock, and this type of capital depreciates far more rapidly than other types (think of how often you need to replace your laptop or cellphone these days). This steady rise in depreciation is a significant reason why the decline in the labor share shown in the BLS NFB measures is larger than in our measure. Yet the decline in the labor share that’s due to the rise of depreciation really doesn’t tell us much about labor market dynamics or macroeconomic slack.

Finally, we choose to strip out the profits of Federal Reserve banks for our measure.2 In the course of their open market operations (buying and selling bonds to move interest rates), the Fed makes profits. These profits are used to finance the Fed’s operations and they remit anything left over to the U.S. Treasury. These profits have very little to do with underlying labor market dynamics or macroeconomic slack. Before 2008, because these profits were generally quite small and relatively stable as a share of corporate sector value-added, they could largely be ignored in examinations of the labor or profit share. Post-2008, however, the Federal Reserve vastly expanded the scale of assets it purchased as part of its effort to hold down long-term interest rates (an effort commonly referred to as “quantitative easing”). This larger balance sheet led to significantly larger Federal Reserve profits during the recovery from the Great Recession. All else equal, this would have led to a further decline in the measured labor share of income. But since these Federal Reserve profits were not the result of increased leverage vis-a-vis workers over implicit wage bargaining, it doesn’t make much sense to allow them to depress the labor share measures we’re examining for evidence about this relative bargaining strength. In recent years, the Federal Reserve profits have been declining as their balance sheet has shrunk modestly. This would, all else equal, boost the labor share of income, but this boost would not represent increased leverage by workers. Given these considerations, our measure of corporate sector income and profits removes the profits earned by Federal Reserve banks. This again leads to a smaller decline in the labor share when compared to the BLS measures over the whole post-Great Recession period.

What does a correctly-measured labor share tell us about policy?

Assume for the moment that our way of tracking the labor share is better for assessing underlying labor market dynamics and the state of macroeconomic slack. This measure contains a number of interesting findings. One finding, which most might find counterintuitive, is that during recessions (the shaded areas on the chart) the labor share actually tends to rise. This mostly tells us that corporate profits are very cyclical, and fall even faster during recessions than labor income.3 But once the official recession is over, these profits tend to recover much faster than labor income and this leads to a rapid decline in labor’s share in the early phases of business cycle recoveries. As recoveries mature and turn into expansions, the reduction in labor market slack eventually allows the labor share to begin making up some of its early-recovery losses.

Another striking feature of our measure of the labor share is how depressed it remains even as we approach 10 years from the end of the Great Recession. This highlights that even wage growth significantly faster than we’ve seen in recent months can persist for a long time before it necessarily translates into inflation breaching the Fed’s 2 percent target. If inflation-adjusted wages start rising faster than economy-wide productivity, this does not necessarily lead to an inflationary wage-price spiral; instead some of this faster wage growth can be absorbed by firms in coming years through a slight reduction in their still quite-fat profit margins. In an earlier paper, we calculated for how long nominal wage growth could outpace the sum of inflation and productivity growth before previous labor share peaks were broached.4 The figure below reproduces these calculations, using the Fed’s 2 percent inflation target and productivity growth averages since the beginning of 2017 (1.1 percent), and various scenarios for nominal wage growth.

Figure C

Reclaiming labor’s lost share still requires significantly faster wage growth: How long would it take to return to pre Great Recession labor share levels at various paces of wage growth?

 

Date 3.2 percent 3.5 percent 4 percent
2007Q4 78.7777% 78.7777% 78.7777%
2008Q1 79.2193% 79.2193% 79.2193%
2008Q2 79.3496% 79.3496% 79.3496%
2008Q3 79.5998% 79.5998% 79.5998%
2008Q4 79.5952% 79.5952% 79.5952%
2009Q1 79.5905% 79.5905% 79.5905%
2009Q2 79.0456% 79.0456% 79.0456%
2009Q3 77.8820% 77.8820% 77.8820%
2009Q4 76.7360% 76.7360% 76.7360%
2010Q1 75.5643% 75.5643% 75.5643%
2010Q2 75.9344% 75.9344% 75.9344%
2010Q3 74.0393% 74.0393% 74.0393%
2010Q4 74.1481% 74.1481% 74.1481%
2011Q1 76.1685% 76.1685% 76.1685%
2011Q2 74.9298% 74.9298% 74.9298%
2011Q3 75.0366% 75.0366% 75.0366%
2011Q4 73.3147% 73.3147% 73.3147%
2012Q1 72.9571% 72.9571% 72.9571%
2012Q2 73.2436% 73.2436% 73.2436%
2012Q3 73.5896% 73.5896% 73.5896%
2012Q4 74.3623% 74.3623% 74.3623%
2013Q1 73.9712% 73.9712% 73.9712%
2013Q2 74.0949% 74.0949% 74.0949%
2013Q3 74.1665% 74.1665% 74.1665%
2013Q4 73.6984% 73.6984% 73.6984%
2014Q1 74.9508% 74.9508% 74.9508%
2014Q2 73.1916% 73.1916% 73.1916%
2014Q3 72.4188% 72.4188% 72.4188%
2014Q4 72.8773% 72.8773% 72.8773%
2015Q1 73.3065% 73.3065% 73.3065%
2015Q2 73.5011% 73.5011% 73.5011%
2015Q3 74.0471% 74.0471% 74.0471%
2015Q4 74.6307% 74.6307% 74.6307%
2016Q1 74.5656% 74.5656% 74.5656%
2016Q2 74.5805% 74.5805% 74.5805%
2016Q3 74.6087% 74.6087% 74.6087%
2016Q4 74.8150% 74.8150% 74.8150%
2017Q1 75.3236% 75.3236% 75.3236%
2017Q2 75.1285% 75.1285% 75.1285%
2017Q3 75.6357% 75.6357% 75.6357%
2017Q4 75.6830% 75.6830% 75.6830%
2018Q1 75.6393% 75.6393% 75.6393%
2018Q2 75.3031% 75.3031% 75.3031%
2018Q3 74.7009% 74.7009% 74.7009%
2018Q4 74.7194% 74.7750% 74.8676%
2019Q1 74.7379% 74.8492% 75.0348%
2019Q2 74.7565% 74.9235% 75.2023%
2019Q3 74.7750% 74.9978% 75.3702%
2019Q4 74.7936% 75.0722% 75.5385%
2020Q1 74.8121% 75.1467% 75.7072%
2020Q2 74.8307% 75.2213% 75.8762%
2020Q3 74.8492% 75.2959% 76.0456%
2020Q4 74.8678% 75.3706% 76.2154%
2021Q1 74.8864% 75.4454% 76.3856%
2021Q2 74.9050% 75.5203% 76.5561%
2021Q3 74.9235% 75.5952% 76.7270%
2021Q4 74.9421% 75.6703% 76.8983%
2022Q1 74.9607% 75.7453% 77.0700%
2022Q2 74.9793% 75.8205% 77.2421%
2022Q3 74.9979% 75.8957% 77.4146%
2022Q4 75.0165% 75.9711% 77.5874%
2023Q1 75.0351% 76.0464% 77.7606%
2023Q2 75.0537% 76.1219% 77.9342%
2023Q3 75.0724% 76.1974% 78.1082%
2023Q4 75.0910% 76.2730% 78.2826%
2024Q1 75.1096% 76.3487% 78.4574%
2024Q2 75.1282% 76.4245% 78.6326%
2024Q3 75.1469% 76.5003% 78.8082%
2024Q4 75.1655% 76.5762%
2025Q1 75.1842% 76.6522%
2025Q2 75.2028% 76.7283%
2025Q3 75.2215% 76.8044%
2025Q4 75.2401% 76.8806%
2026Q1 75.2588% 76.9569%
2026Q2 75.2775% 77.0333%
2026Q3 75.2961% 77.1097%
2026Q4 75.3148% 77.1863%
2027Q1 75.3335% 77.2629%
2027Q2 75.3522% 77.3395%
2027Q3 75.3709% 77.4163%
2027Q4 75.3896% 77.4931%
2028Q1 75.4083% 77.5700%
2028Q2 75.4270% 77.6470%
2028Q3 75.4457% 77.7240%
2028Q4 75.4644% 77.8011%
2029Q1 75.4831% 77.8783%
2029Q2 75.5019% 77.9556%
2029Q3 75.5206% 78.0330%
2029Q4 75.5393% 78.1104%
2030Q1 75.5581% 78.1879%
2030Q2 75.5768% 78.2655%
2030Q3 75.5956% 78.3432%
2030Q4 75.6143% 78.4209%
2031Q1 75.6331% 78.4987%
2031Q2 75.6518% 78.5766%
2031Q3 75.6706% 78.6546%
2031Q4 75.6894% 78.7326%
2032Q1 75.7082% 78.8108%
ChartData Download data

The data below can be saved or copied directly into Excel.

Note: Sources and methods for data through third quarter 2018 the same as Figure A. All projections after that date assume annual productivity growth of 1.1 percent - the pace that characterized productivity growth from the beginning of 2017 to the most recent GDP data (third quarter of 2018). All projections also assume that the Fed hits its stated 2 percent inflation target. The 3.2 percent growth rate is slightly faster than what characterized wage growth for all workers as measured by the Current Employment Statistics (CES) program of the BLS.

Source: EPI labor measure is analysis of Bureau of Economic Analysis National Income and Product Accounts (Tables 1.14 and 6.16D). BLS NFB measure is from the U.S. Bureau of Labor Statistics Productivity and Costs (LPC) program, series # PRS85006173. BLS labor share measure retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/PRS85006173, January 24, 2019.

Copy the code below to embed this chart on your website.

The results are striking. The 3.2 percent wage growth that characterized the last quarter of 2018 would take literally decades and decades to yield a return to the labor share that characterized the last quarter before the Great Recession hit (the last quarter of 2007, or 2007Q4). 3.5 percent growth—the long-run target we referenced before—would only return the economy to the 2007Q4 labor share level by 2031. Even 4 percent nominal wage growth would only see the labor share return to 2007Q4 levels by the end of 2024. We should note here how fundamentally conservative these projections are, in that they assume productivity growth only runs at 1.1 percent in coming years, even as labor markets tighten and wages rise. If productivity growth—spurred by firms looking to make labor-saving investments as wages rise—instead moves closer to its long-run average of 1.5 percent, then it would take even longer at any given pace of wage growth to return to historical labor share levels.

Is it possible that structural changes, not just prolonged labor market slack, have contributed to the fall in the labor share and macroeconomic reflation alone won’t be able to claw back this post Great Recession decline? It’s possible—and the most-sensible theory for what precise structural change might have led to this is a rise in monopoly power. Empirical research clearly shows upticks in industry concentration ratios, and a number of large and crucial economic sectors (health care and finance, in particular) are characterized by immense pricing power. Other sectors (mostly technology) have also seen waves of consolidation that have not led (yet?) to rapid price growth, but have raised a whole host of concerns about the intersection of economic and political power.

And yet the first priority in setting the conditions for better wage growth remains pushing down the unemployment rate and wringing out any last sign of slack from the labor market. In fact, our examination of labor share indicates that we can’t even diagnose the extent of the monopoly problem’s effect on wages and incomes until we wring out this labor market slack and spark some wage-driven price inflation.

Consider the recovery following the recession in the early 1990s. Between the third quarters of 1990 and 1997, labor’s share of income in the corporate sector fell by almost 5 percentage points. This a big change—a change like that today would translate into about $600 billion being claimed by capital-owners rather than workers. So, this fall in labor’s share was large, but it was also quite persistent; seven years is a long time to see the labor share not recover from a recession-induced fall. Because most economists in 1997 thought the economy was clearly at full employment even as sluggish wage growth kept labor share flat, new theories were pushed forward (just like today) about how sluggish wage growth must be being driven by something else besides labor market slack. Skill-biased technological change was the fashionable explanation at the time.

But, three years later, in the third quarter of 2000, labor share was just 0.3 percentage points below its 1990 peak and wages had risen sharply across-the-board. What changed in those three years between 1997 and 2000? Unemployment continued to fall and the share of employed adults (and prime-age adults) continued to rise, tightening up labor markets. The real innovation of this period was a Fed that did not preemptively raise interest rates to choke off falling unemployment; instead they waited for actual wage-driven price inflation to appear in the data. When it didn’t, they let the recovery continue.

Today’s Fed should follow this advice and assume that the U.S. economy can restore the labor share of income lost during the recovery from the Great Recession; at least until the data tells us that it cannot by showing a large jump in inflation before this share is restored.

This is a preview edition of a new macroeconomic policy briefing that will be published by the Economic Policy Institute before each FOMC meeting. These analyses will take a deep dive into one aspect of monetary or other macroeconomic policies and data. To receive the briefing in your inbox, sign up below.

 

1. See Bivens (2015) and Bivens (2017) on the rationale for this nominal wage target and for evidence that recent years’ productivity malaise should not lead to large downward revisions in estimates of the economy’s potential productivity growth rate.

2. We call these “profits” of Federal Reserve banks because that’s what the Bureau of Economic Analysis (BEA) labels them in the data. Given that the Federal Reserve system is not a private business, it’s a bit of a strange label for lots of reasons, but we’ll follow the convention here.

3. This recession-induced rise in the labor share is most striking in the last half of 2008, as the write-off of the value of bad loans in the financial sector was reflected in large, one-time declines in corporate profits, sending labor’s share soaring for these quarters.

4. See Figure 7 in Bivens (2015).