By: William Dunkelberg, Contributor Forbes

Sluggish labor compensation growth, in particular wage growth, has been one of the Federal Reserve’s major concerns. This is a concern because the Fed links rising wage costs with subsequent inflation, which it is trying to produce, with a target of 2 percent growth in the PCE deflator. The thinking apparently is that without rising labor costs, firms will not raise prices and the desired inflation will not appear. It would also be the case that if strong wage growth spurred stronger spending, which pressed against the supply of goods and services, and provided opportunities for firms to raise prices, inflation might come to life.

Labor’s share of National Income has been depressed in this recovery from 2009-present, even though the unemployment rate has declined to “full employment” levels. Wages and prices have not risen substantially as is typically the case at “full employment” (or “maximum employment”). One reason for this is the decline in productive activity. As the percent of the adult population with a job has declined from 65 percent in 2000 to 59 percent today, there are a lot fewer wage earners relative to the population and the size of the business sector. Prior to 2008, labor share of National Income was low during periods when the percent of owners reporting price hikes was roughly equal to the percent raising compensation, thus passing labor costs on to customers. However, the Great Recession ushered in a period of declining labor share that appears stubbornly permanent even though half of the decline is due to a significant change in the way the BLS computes labor share. Read More