Wednesdata - January 22 - Make America Pessimistic Again. Labor share is ... back down

It might be getting worse after briefly getting better

For a long time, studying inequality resembled this meme:

But then, things looked like they were changing. If you looked around the internet in late 2021 through the end of 2023, you’d see lots of optimistic arguments about the American economy. These would include observations about declining inequality, rising wages among lower paid workers, tight labor markets, declining poverty, and rising living standards. As far as I can tell, all these claims were mostly true. However, I suspect that we are on a potential path towards more economic pessimism along these dimensions.

Let’s focus on one such dimension: the share of total income going to workers (think of this as a rough proxy measure of the power of workers relative to businesses, employers, big wealth holders). The BLS has a nice definition.

Here are trends through the end of 2021.

In late 2021, you could say: there was a massive decline in the share of income going to labor. But that decline stalled in roughly 2012 and then increased slightly following the pandemic.

Well, let’s look at the same figure through 2024, according to the Federal Reserve:

Whelp, we have yet again reached historical lows. And if we compare across the whole time series:

Does this look like an improving situation? Not to me. We see that things have gotten really bad in the 21st century, stabilized, and then got a little bit worse after the pandemic. Not great.

If we zoom into the era of stability and slight improvement, 2012 to the present, we see that all modest gains were lost following 2022.

Bummer. Another definition shows similar conclusions: whatever gains were made in the 2012 - 2021 period have been lost.

So we are back again to a pessimistic state of affairs: the share of total income going to labor has never been worse, and we’re in a period of pretty serious decline. Ah, makes me feel young.

Overall, I feel a bit of whiplash. The inequality literature in 2021 was probably too pessimistic and failed to notice the very important trends of stabilizing inequality in the 2010s. By the end of the pandemic, I think that plenty of researchers pushed hard enough to get folks to see that inequality was no longer skyrocketing out of control. But now, I wonder if we’re seeing a return to the pre-2012 trend. We need more time to see, but we can definitely conclude that, from mid 2022 onward, things are not getting better.