One of the most important secular, or structural, trends over the last two decades has been the decline in labor’s share of national income, after being relatively stable for all of the post-war period. The trend helps to explain the rise of populism, the disenchantment with globalization, and to some extent lower interest rates (via a flatter Phillips curve). It has also helped to provide a powerful tailwind to the structurally higher profits margins over this period, which in turn has helped to justify the structurally higher P/E ratio (i.e., the S&P 500's cyclically adjusted P/E ratio). As a result, getting a good handle on what's behind this trend and its durability is crucially important for policymakers as well as investors. In this week's Economics Weekly, we examine some of the possible reasons behind the decline in the labor's share of national income, and where it might be heading next.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.