The Impact of the Unemployment Rate Gap on the Labor Share of Income

Christopher Herdelin

Eastern Economic Journal, 2025, vol. 51, issue 3, No 6, 456-471

Abstract: Abstract In this paper, I investigate the impact of short-term movements in the labor share of income as a result of changes in the dynamics of the labor market using annual data for the period 1950 to 2010. The key research question in this paper is whether the unemployment rate gap in the labor market (the difference between the current unemployment rate and the NAIRU) impacts the labor share of income relative to other factors, such as real wage growth and labor productivity growth. The impact of the unemployment rate gap on each of the other factors of the labor share is also analyzed, as well as how each of these factors impacts the labor share itself. The role of the central bank in promoting maximum employment is discussed in light of the relationship between the unemployment rate gap and the labor share. A reduced-form VAR model is used to assess the impact of a shock to the unemployment rate gap on changes in the labor share of income. The results of the VAR model suggest that a shock to the unemployment rate gap has a stronger response to changes in the labor share relative to each of the other factors, such as real wage growth and labor productivity growth. This result is important for policymakers such as the Fed through its mandate of maximum employment because monetary policy if it is too tight for prolonged periods can have an adverse effect on the labor share of income, which has itself experienced a long-run secular decline over the last five decades.

Keywords: Employment; Income distribution; Monetary policy (search for similar items in EconPapers)
JEL-codes: E12 E24 E52 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41302-025-00302-y

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