As Dean Baker pointed out to me this AM, the labor share of national income is slowly gaining back some of its losses, as shown in the figure below (see circled part at end). This is a good thing, and should, to some extent, reduce inequality by shifting some of the growth from profits into paychecks.
Since there’s a lot of inequality within labor’s share of national income, this development won’t reduce inequality that much. That is, income growth is still disproportionately going to higher paychecks, as Elise Gould shows here. But the shift you see below is a distributionally positive development, and evidence that the tight job market is delivering a bit more bargaining power to workers (these shares don’t sum to 100 percent because they leave out proprietors’ incomes, as it’s hard to break that down between wages and profits).
My point here, however, is a bit different, and it’s one targeted at the Federal Reserve. Nor is my point simply to badger them not to raise rates pre-emptively, potentially slowing the progress you see in the figure.
Um…well, maybe it kinda is, but with a bit of the sort of math they enjoy over there.
Chair Yellen has consistently maintained that as long as nominal wages grow no faster than the Fed’s inflation target of 2 percent plus productivity growth, which is running at (a truly yucky) 1 percent these days, wages can grow 3 percent without generating inflationary pressures.
In other words, in Fed land non-inflationary wage growth (NIWG) = i + p, where i is the inflation target and p is productivity growth. When last seen, wages were growing between 2-2.5 percent, so steady as she goes, based on this rule.
But based on the figure above, I’d like to add an x-factor to that above equation, such that:
NIWG = i + p + x
…where x represents the pace at which the gap you see above is closing. That is, there’s another component to NIWG: rebalancing labor’s share of national income. Usefully, the math of how that gap closes reduces to how much faster average compensation is growing compared to productivity (as the gap opened up post-2000, average comp growth consistently outpaced productivity).
In other words, if you’d like to see “factor shares”—the shares of income going to capital and labor—rebalance, then you want to allow for another source of non-inflationary wage growth: redistribution from profits to wages.
Thankfully, economist Josh Bivens, who wrote about all of the above for CBPPs full employment project, figured out that if x were, say 1 percent—i.e., if average compensation grew 1 percent faster than productivity growth—it would take over eight years for the gap to get back to its pre-recession level.
More to the point, it would lead the Fed to tolerate 4 percent versus 3 percent wage growth.
I don’t mean to push the precision of any of this too far. For one, p is, as noted, pretty depressed right now, and it could accelerate, providing more oxygen for NIWG. More importantly, the evidence of wage growth bleeding into price growth has been pretty hard to come by in recent years, so I wouldn’t put a ton of weight on the basic model in the first place.
My only point is that if, like the Fed, this is the model you’ve kind of got in your head, then there’s another factor—another source of non-inflationary wage growth—that you should seriously consider.