The R*–Labor Share Nexus

Sophia Cho and John Williams

No 20260415, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Over the past quarter century, the U.S. economy has experienced significant declines in both the labor share of income and the natural rate of interest, referred to as R*. Existing research has largely analyzed these two developments in isolation. In this post, we provide a simple model that captures the joint evolution of the labor share and R*, which we call the R*–labor share nexus. Our key finding is that structural changes affecting R* also influence the evolution of the labor share, and thereby wages and prices. This highlights a potentially important channel, absent from many macroeconomic models, through which the factors that determine R* also affect the labor share and, in turn, broader macroeconomic developments, with implications for monetary policy.

Keywords: R-star; natural rate of interest; labor share; monetary policy (search for similar items in EconPapers)
JEL-codes: C32 E25 E43 E52 (search for similar items in EconPapers)
Date: 2026-04-15
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fednls:103044

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DOI: 10.59576/lse.20260415

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