On the Anchoring Effect of Monetary Policy on the Labor Share of Income and the Rationality of Its Setting Mechanism

TL;DR

The paper addresses whether and how to rationally set the labor share via monetary policy and what room nonpolicy actors have to hedge against that anchor. It integrates modern macro models (DSGE and HANK) and a simplified production function $Y = A \cdot (1 - LS)^\alpha$ to derive the theoretical optimum $LS^* = \frac{1}{1 + \alpha}$. It introduces a look-through measure $LS_{real} = \frac{W_{median} \times LP}{M2 \times Time}$ and demonstrates alignment with the 2024 US labor share around 54–55%. It argues for an 'administrative anchoring' framework with three core parameters (factor distribution, financial stock stability, external strategic steady state) and discusses how a 'Strong Central Bank' can override micro-level agents, while certain productivity regimes constrain policy. The paper highlights transparency as a governance concern and discusses implications for social welfare, capital accumulation, and cross-border capital flows.

Abstract

Modern macroeconomic monetary theory suggests that the labor share of income has effectively become a core macroe-conomic parameter anchored by top policymakers through Open Market Operations (OMO). However, the setting of this parameter remains a subject of intense economic debate. This paper provides a detailed summary of these controversies, analyzes the scope of influence exerted by market agents other than the top policymakers on the labor share, and explores the rationality of its setting mechanism.