The U.S. labor share of income has reached its lowest point in the post-war era, falling 1.6 percentage points below pre-pandemic levels. This metric tracks how much of economic output goes to workers as wages and salaries, making it a vital barometer for wage growth relative to productivity and prices. When the labor share declines, workers capture less of the economic pie even as output expands.

For decades after World War II, the labor share remained remarkably stable around 63 percent. However, beginning in the early 2000s, it entered a sustained downward trajectory, with particularly sharp drops during the global financial crisis. The post-COVID decline continues this trend rather than representing a new phenomenon, according to analysis by Liberty Street Economics.

Researchers examined how the labor share behaved across multiple recession cycles, finding that post-COVID dynamics align more closely with pre-2000 recessions than the steeper declines seen in the 2000s. During earlier post-2000 recessions, the labor share fell sharply during expansions without meaningful recovery, unlike the more typical pattern of pre-2000 cycles where it rebounded during later expansion phases.

Using a shift-share decomposition method, the study determined that within-industry changes, not sectoral reallocation, drove the recent decline. While economic activity did shift across sectors during the pandemic, these movements contributed minimally to the aggregate labor share drop. Instead, changes in how industries compensate workers internally explain most of the decline, suggesting the problem lies in wage-setting practices rather than industry composition shifts.