Today, the Cleveland Fed issued the following release (bold added):
Since the early 1980s, labor’s share of total income in the US has dropped significantly. At the same time, labor income has become more concentrated among those at the top of the income scale. These two factors have contributed to an increase in income inequality. In the coming years, the labor share will partially recover, but income inequality is likely to continue to increase, say Federal Reserve Bank of Cleveland researchers Filippo Occhino and Margaret Jacobson.
The decline in labor’s share of income can be attributed to technology and increased globalization, among other factors. And labor income has become more concentrated at the top as the productivity of high-skilled workers has increased relative to low-skilled workers, driving the demand for high-skilled workers higher and raising their relative compensation.
Historically, labor income has been more evenly distributed across U.S. households than capital income (i.e., interest and investment returns), a disproportionately large share of which accrues to the top-earning households. As the share that is more evenly distributed declined and the share that is more concentrated at the top rose, total income became less evenly distributed and more concentrated at the top. As a result, total income inequality rose.
Part of the decline in labor’s share of income in the past five years was temporary, and will be reversed as the recovery progresses. The future path of labor concentration, though, is hard to predict, say the researchers. It depends on the evolution of the returns to education and of the wage-skill premium.
The concentration of capital income, however, is strongly procyclical and rises during recoveries. This, Occhino and Jacobson note, suggests that capital income will become more concentrated at the top in the coming years of the recovery, helping to raise income inequality even further.
Earlier, on September 18, New York Fed President William Dudley indicated a renewed commitment to the Fed’s labor market mandate:
Based on the New York Fed’s indices, economic activity in the state did not begin to recover until November 2010, more than a year after the nation and New York City. Since then, activity has recovered at a moderate pace, although we are still operating below our previous peak.
As I mentioned earlier, we have two goals—to promote maximum employment and price stability. We therefore seek to minimize how far employment is from its long run normal level and inflation is from our longer-run goal of 2 percent on the PCE measure.
It is important to recognize that our tools are not all-powerful—monetary policy is not a panacea for all that ails our economy. But, at the margin, firms facing lower borrowing costs for any given economic outlook will invest and hire more … I believe that a nudge in the right direction will move us closer to a self-reinforcing cycle of more hiring, more spending, more growth, and more investment. This is the type of virtuous cycle that we should seek and one that is consistent with a self-sustaining and improving economy.
On September 20, Minneapolis Fed President Narayana Kocherlakota spoke in a tack away from previous statements that the Fed’s capacity to influence the labor market was limited:
I will suggest the following specific contingency plan for liftoff:
As long as the FOMC satisfies its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent.
In some circumstances, it may be appropriate to follow policies that lead the medium-term outlook for inflation to deviate from the long-run target. Indeed, most central banks—including ones that do not have an employment mandate—find that this kind of flexibility is desirable.