Discretionary monetary policy, quantitative easing, and the decline in US labor share

Since the turn of the millenium, labor shares of income in the US and other OECD countries have been declining (OECD, 2012; Elsby et al., 2013). Piketty's (2014) influential book has drawn attention to this decline in labor shares and has argued that it may be an inevitability that is inherent in capitalist economies. Other authors have argued that globalization may be a cause (Harrison, 2005; Guscina, 2006; Schneider, 2011). In this note we explore the possibility that in the US discretionary monetary expansion has played a role. Limited participation and Cantillon effects may lead to a transfer of income from providers of labor services to owners of capital. We estimate the relationship between monetary policy innovations and labor share based using VARs containing federal funds rate changes, monetary base growth, or the principle component of a set of monetary/interest rate variables. VARs are estimated separately for the 1986-2002 (rule-based), 2003-2014 (discretionary), and 2008Q3-2014 (quantitative easing). We report that positive monetary policy innovations are associated with statistically significant, persistent decreases in labor shares in the later (discretionary and quantitative easing) periods.