Labor's Declining Share of Income and Rising Inequality

Source: Margaret Jacobson and Filippo Occhino, Federal Reserve Bank of Cleveland, Economic Commentary, September 25, 2012

Labor income has been declining as a share of total income earned in the United States for the past three decades. We look at the past effect of the labor share decline on income inequality, and we study the likely future path of the labor share and its implications for inequality.

Labor income has declined as a share of total income earned in the United States. This decline was caused by several factors, including a change in the technology used to produce goods and services, increased globalization and trade openness, and developments in labor market institutions and policies.

One consequence of the labor share decline has raised concerns. Since labor income is more evenly distributed across U.S. households than capital income, the decline made total income less evenly distributed and more concentrated at the top of the distribution, and this contributed to increase income inequality. In this Commentary, we look at how the labor share decline has affected income inequality in the past, and we study the likely future path of the labor share and its implications for inequality.

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