The relative strength of household income adjusted for economic growth can be seen in the laborís shareóthe fraction of the business sectorís net revenue that goes to labor costs.

The recent decline isnít perfectly understood, though most researchers ascribe some role to global trade and how this has affected the bargaining power of labor.

Global imbalances funded the rise in household leverage, and global developments may be limiting the speed at which households generate income to pay down that debt.

There have been several attempts to explain the decline, but the most successful ones have looked to changes in labor market institutions and changes in openness to international trade. The two are not independent, as changes in openness to global forces can alter laborís bargaining power and vice versa. It may not be too surprising that studies that examine the relation between trade openness and the labor share generally find an inverse correlation: across a number of developed countries, greater openness to trade has reduced laborís ability to obtain a bigger slice of the pie.

Since the early twentieth century, business cycle analysis has assumed that steady labor income would help household consumption to serve as an anchor of demand, thereby leading the economy out of downturns. With the labor share now moving more in sync with the overall economy, the rhythm of the business cycle will take on new and unfamiliar patterns.

Last Updated:29-Jun-12
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