Can we tame inflation without hurting workers?
A big question before us and Jay Powell is whether the labor market needs to suffer — that is, whether unemployment needs to go up significantly — in order for inflation to come down. It’s an open question.
But connected to it is another question: How much of the income pie goes to workers? Because if companies are OK with making a little less money, they can theoretically keep more workers. Will that happen?
There are ways — theoretically — for inflation to fall without tons of people getting laid off. It could be done through productivity growth and increasing the labor supply.
There’s another way too: “That’s if businesses accept lower profit margins — basically businesses are absorbing some of that additional cost of workers,” said Sarah House, senior economist at Wells Fargo.
By one argument, there’s space for that to happen. Martin Lettau, a professor of economics at UC Berkeley, looked at how much profit has gone to workers and how much has gone to the stock market, through dividends for example.
“In our work, we found that the ratio of that notion of profits has increased as a total share relative to labor,” Lettau said.
If you look at a chart showing the share of gross domestic income (that is, all the income in the whole economy) from 1980 to now, you can see that workers’ share has gone down from about 58% to 53%. Meanwhile, corporate profits have gone up from around 8% to 12%. But it depends how you slice things.
“You don’t see this pattern of dramatic decline in labor share when you’re looking at the net measures of gross domestic income,” said Erica York, a senior economist at the Tax Foundation.
Basically, if you look at how much income goes to labor versus capital and net out things like taxes and depreciation, York said that labor’s share is stable.
Still, Dario Perkins, managing director at TS Lombard, believes power in the economy is shifting to labor.
“Because labor markets are so tight, we’re beginning to see workers claw back some of those losses,” Perkins said.
Whether that is true or not is going to shape what this economy looks like in a few years, as well as what a recession — if there is one — would do to the labor market.
Correction (March 8, 2023): A previous version of this story inaccurately stated workers’ and corporations’ shares of gross domestic income.
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