Discussion Paper

The R*–Labor Share Nexus

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.

JEL Classification: C32; E25; E43; E52;

https://doi.org/10.59576/lse.20260415

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2026-04-15

Number: 20260415