Anna Stansbury and Lawrence H. Summers wrote a paper for the American National Bureau of Economic Research this month, titled: The Declining Worker Power Hypothesis: An Explanation for the Recent Evolution of the American Economy. You can buy a PDF version for $5.

Rising profitability and market valuations of US businesses, sluggish wage growth and a declining labor share of income, and reduced unemployment and inflation, have defined the macroeconomic environment of the last generation. This paper offers a unified explanation for these phenomena based on reduced worker power. Using individual, industry, and state-level data, we demonstrate that measures of reduced worker power are associated with lower wage levels, higher profit shares, and reductions in measures of the NAIRU.

As an aside, I had to check what NAIRU was. According to Investopedia:

The non-accelerating inflation rate of unemployment (NAIRU) is the specific level of unemployment that is evident in an economy that does not cause inflation to increase. In other words, if unemployment is at the NAIRU level, inflation is constant. NAIRU often represents the equilibrium between the state of the economy and the labor market.

Tyler Cowen from Marginal Revolution quoted Larry Summers and Anna Stansbury’s responses to the paper, where they draw a connection between wealth inequality and falling interest rates. Emphasis added.

If corporate profits are so high, how is this consistent with the persistently low demand postulated by Summers’ “secular stagnation” hypothesis?

Secular stagnation as we think of it is the product of a rising gap between the desire to save and the desire to invest (which, in an IS-LM type framework, would push down the neutral real interest rate).

Falling worker power redistributes income from lower and middle-income people to the rich. The rich have a higher propensity to save. Thus, falling worker power increases the desire to save relative to the desire to invest. Rising inequality has been posited by several authors as a contributor to the declining neutral real interest rate (see e.g. Smith and Rachel 2015). Under this view, secular stagnation is exemplified by low private return to capital investment – but, in a noncompetitive world, this may or may not be the same thing as an abnormally low profit rate or capital share.

This is also why stimulus spending is most effective being targeted at people at lower income levels. It’s not just the most ethical thing to do, it will have the most immediate economic impact.