Working Americans are now getting the smallest slice of the income pie on record — which, combined with high unemployment, could be behind the slow speed of the economic recovery.
The decline is not a new trend, but it shows up again in last week's release of third-quarter productivity and costs. The labor share — the amount paid to workers instead of businesses and other income-earning entities — was reported to have fallen to 57.1 cents on the dollar for the business sector, its lowest level since it was first reported by the Bureau of Labor Statistics in 1947.
J.P. Morgan economist Michael Feroli highlighted the decline in a recent note. He said the pre-2000 average for labor share was 63.9 cents, and if it were still at that level household income would be $780 billion higher, a helpful boost in a period of high unemployment. Even at more recent levels, income would have been $400 billion higher, he says.
Households' net worth, as reported by the Federal Reserve Thursday, isn't doing so great either. IHS Insight economist Gregory Daco points out the third quarter saw the biggest decline since the collapse of Lehman, falling $2.44 trillion as financial assets fell $2.66 trillion. Real estate assets actually rose $102 billion.
Daco said, however, the good news was that consumer spending managed to grow by 2.6 percent. Some of that was on the back of a lower savings rate, but also more credit and somewhat lower prices, particularly for gasoline.
Labor share, meanwhile, has been falling since the 1980s, but it has been on a steeper downward trajectory in the past three years. Its three-decade decline has to do, in part, with globalization and the transfer of jobs overseas, but Feroli notes it has also been depressed by the weak labor market.
The share of output that doesn't go to labor generally goes to capital, which includes corporate profits and such things as depreciation, interest and rent. But profits are the most variable, and Feroli says its corporate profitability, at record levels, that has benefited the most from the decline in labor share. The number also isn't clear cut since business owners' income can count as capital, not labor.
Feroli also notes there has been a change in the cyclical behavior of the data. Prior to 1983, a rise in the unemployment rate was accompanied by a counter trend rise in labor share. But that has reversed and now as unemployment worsens, the labor share falls, reflecting a change in corporate behavior. Companies may have previously more been bound by union contracts or discouraged by hiring and firing costs in the past.
Feroli said with labor share now moving in sync with the overall economy, the rhythm of the business cycle could take on new, unfamiliar patterns.
"It certainly changes the structure of how recoveries work," he said. "You used to think consumers were the steady anchor who would always keep spending in a downturn, and that would give businesses confidence. Now when the economy turns south, the consumers aren't necessarily going to the be the first ones out of the starting block."
"It may be one of the elements behind the fact that we're taking a bit more time in terms of getting out of this slump," said Daco. "One thing that's interesting on the employment front, on the labor front. Despite the last month, where the labor force actually shrunk, we did see in the previous three months increases in the labor force, meaning people are coming back to look for work as the economic outlook for the U.S. improves."
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