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 fin...
This analysis operates in **ACADEMIC MODE**, as it presents a structured economic model with statistical testing, literature review, and policy implications. The methodology is robust, employing cointegration tests to establish a long-run relationship between the labor share and R*, a technique appropriate for nonstationary time series. The authors acknowledge potential idiosyncratic factors but demonstrate that R* explains significant variation in the labor share, with estimates remaining stabl...