Regional Feds Weigh In on U.S. Labor Situation: Time to Worry About the Employment Mandate

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.

4 Responses to "Regional Feds Weigh In on U.S. Labor Situation: Time to Worry About the Employment Mandate"

  1. benleet   September 26, 2012 at 12:23 pm

    Capitalism is flawed in that it trends towards self-destruction. This is the import of this article. Can the economy achieve its full potential with high inequality? No. Impossible. Purchasing demand is shut-down with low labor compensation, demand falls, hiring diminishes, and full potential is lost. Higher poverty and economic insecurity also results. This should sound familiar. It's our present story. Federal Reserve Chairman Marriner Eccles, who served between 1934 and 1948, made the same argument in his memoir in 1951 after decades of reflection on the topic. Only a political mandate made by a disapproving democratic electorate can reverse the trend, as they did in the 30s, 40s, 50s, 60s. Capitalism is flawed in that it tends towards self-destruction, as we are seeing. A self-sustaining expansion, achieving full employment and full potential, is possible only by distributing the rewards of work in a morally acceptable balance with conscious policy to maintain balance — Economic theory has not given adequate attention to this problem. Martin Wolff, columnist at the Financial Times, speaks occasionally about this, "income destroys capital" is how he characterized one possible outcome of the recession. My blog has a longish article about it, This is an interesting and important article, I recommend looking at the source paper from the Fed cited. Floyd Norris at the NYTimes also reported the basic facts in Aug. 2011. The State of Working America has a table showing income sources and distribution, year 2007, see… — 80% of households receive 27.2% of total income from wage income, and 45% of all income including all income sources which includes government transfers. The decline in union power is my candidate for most important factor in the growing imbalance of income and wealth, resulting in the deterioration of the quality of living standards. The average wealth is about $500,000 per household, the median $77,300, and about 3 in 8 households own less than $12,500. That's not full potential.

    • John Cardillo   September 28, 2012 at 3:19 pm

      Benleet makes an excellent point! If markets were completely free and open, would the natural tendancy for producres to choose the lowest cost source of labor and for consumers to choose the lowest cost products result in an economy running at its full potential. Do these seemingly rational decisions lead down a path where both producers and consumers drive themselves out of a job. I would like to know what macro-economic policies changed in the 70's to reverse the balance and growth in the 30s, 40s, 40s and 60s.

  2. Kathryn Blair   September 26, 2012 at 3:28 pm

    In high tech we say "technology is the answer, but what was the question." Economics seems to have a similar problem and focuses too much on measurements like "productivity" which does not take into account important social goals which are often defeated when increasing productivity is allowed to become a value—which it is not.

    Why not try and create a hybrid corporation which takes into account the needs of people as well as the health of the company? Some examples of companies moving in this direction are Whole Foods, Starbucks, Nucore. these companies are experimenting with more sustainable business models….whole foods allocates a "wage budget" to entire groups and lets the group work out how many hours each person works….they are rewarded for various customer excellence milestones. These are just some examples which included thinking that intentionally works at building a satisfying society rather than just making money as an intrinsic value of good.

  3. Kathryn Blair   September 26, 2012 at 3:38 pm

    Also, language is really important when working in economics—-if we continue to use "objectifying" terms like "labor" its easy to forget we are talking about people. Being "objective" has a lot of flaws and has led to a weird kind of distancing which allows concepts such as "globalization" to take over entire cities and destroy them by exporting too many good jobs while neglecting the citizenry. There are limits to "being objective" if that practice creates more harm than good for people in a city or society.