Inflation Week Ahead: Labor Income Share Hits Record Low

Overview

This week's UBS Weekly Macro Report focuses on the upcoming April inflation data and structural issues in the labor market. The report expects CPI data for April to continue rising, possibly reinforcing the Federal Reserve's hawkish tone. Additionally, a special analysis delves into why the U.S. labor income share reached a record low in the first quarter of 2026, attributing the core reason to the long-term structural decline in workers' bargaining power. Furthermore, the report reviews dynamics such as April employment figures, tax rebate tracking, and household debt.

Core views

Inflation and Economic Data Forecasts: UBS forecasts that overall CPI for April will increase by 0.59%, with the year-over-year rate pushing up to 3.76%. Core CPI is expected to grow by 0.37% month-on-month, with an annual rate of 2.73%. Rising gasoline prices have driven up overall inflation. Owner equivalent rent and tenant rent have also seen strong growth due to the elimination of statistical biases from last autumn’s government shutdown. Combined with PPI and import price data, the core PCE for April is expected to rise by 0.25% month-on-month, with a year-over-year rate of 3.27%. Moreover, controlled group retail sales are forecasted to grow by 0.4% month-on-month, supported by robust tax rebates. The first-quarter household debt and credit report is expected to show rising debt levels and persistently high default rates, particularly among low-income borrowers. Historically Low Labor Income Share: According to the Bureau of Labor Statistics, the labor income share in the first quarter of 2026 fell to its lowest level since records began. This holds true whether measuring labor income by employee compensation or including proprietor income, regardless of whether the denominator is national income, domestic income, or output. Academic literature offers various explanations, including globalization, automation, political capture, rising corporate pricing power (higher markups), and population aging. However, a common theme throughout is the lack of wage bargaining power among workers. Persistently Weak Bargaining Power: Although there was a temporary rebound in nominal wages and worker bargaining power during the pandemic due to labor shortages, the previous trend resumed dominance after late 2024. Since then, the unemployment rate has risen, and all indicators have declined again. Whether examining nominal wage data, quit rates, strike activity, or household surveys, none indicate that workers believe they possess new bargaining power. Strike activities were close to their series lows in 2025, and unionization rates also hit a new low, indicating limited ability for workers to negotiate higher wages. Real Wages and Economic Implications: Real average hourly earnings decreased again in March due to rising gasoline prices, with no real growth causing significant concern among voters regarding economic burden capacity. This is crucial when assessing inflation: given current strong corporate pricing power, cost shocks like oil price increases are more likely to directly erode consumer purchasing power rather than convert into wage-price spiral inflation. It also relates to whether AI investment can truly benefit workers: optimistically, productivity gains from AI would feed back into real wages without triggering inflation; pessimistically, returns may primarily accrue to capital owners.

Analysis framework

For the specialized analysis, UBS employed a step-by-step approach from macro to micro perspectives. First, by reviewing multi-dimensional data from the Bureau of Labor Statistics (non-agricultural sectors, domestic income basis, etc.), it confirmed the objective fact of historically low labor income share. Then, the report introduced an academic framework from labor economics, reviewing historical milestones such as the PATCO strike of 1981 and David Card's minimum wage studies to argue for the structural decline in workers' bargaining power. Methodologically, the report used proxies like strike intensity, resignation rates ('voting with feet'), and unionization rates to quantify bargaining power assessment, going beyond mere theoretical speculation. For macroeconomic forecasting, the report dissected the drivers behind CPI sub-components (gasoline prices, rents, and eliminated statistical biases) to derive overall inflation trends, using tax rebate tracking data and household debt and credit data to cross-validate retail sales prospects and financial pressures on low-income groups.

Methodology notes

• Macroeconomic frameworkPhillips curve

  Bargaining Power and the Phillips Curve

  The report mentions that the 1981 PATCO strike might have altered the wage Phillips curve for unionized workers. The Phillips curve describes the inverse relationship between unemployment rates and inflation (wage growth); if workers’ bargaining power experiences a structural break, changes in unemployment will be less effective in boosting wage growth, making it a key analytical tool for assessing whether inflation can sustainably fall.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Labor Market Supply-Demand and Bargaining Power

  By observing the tightness of labor supply and demand (e.g., unemployment rates, resignation rates, strike activities), the report infers relative worker bargaining power. When labor demand far exceeds supply, workers’ bargaining power rises; conversely, it falls. This supply-demand framework is central to analyzing wage growth and inflationary pressures.

• Macroeconomic frameworkOthers

  Labor Income Share

  Labor income share refers to the proportion of economic output allocated to workers as compensation. By tracking the long-term declining trend of this share, the report assesses shifts in income distribution patterns. A falling share means economic growth benefits are increasingly accruing to capital rather than labor, profoundly impacting consumption capabilities and inflation trajectories.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Seabridge Gold (SA)

  Benefiting: Higher inflation expectations and eroded purchasing power typically lead investors to favor gold and other precious metals as hedge assets

• Baker Hughes (BKR)

  Benefiting: Increased energy exports and rising oil prices boost demand for oilfield equipment and services

• Spire Inc (SR)

  Mixed Impact: Natural gas price fluctuations directly affect utility costs and consumer burdens

• Essent Group (ESNT)

  Adversely Affected: Rising default rates among low-income borrowers put pressure on mortgage insurance business asset quality

Key data

• April Overall CPI Forecast0.59%Year-over-year rate predicted to rise to 3.76%, driven by increasing gasoline prices
• April Core CPI Forecast0.37%Year-over-year rate predicted to rise to 2.73%, with strong rental growth
• April Core PCE Forecast0.25%Year-over-year rate predicted to be 3.27%
• April Non-Farm Payroll Additions115,000Partially driven by seasonal adjustments and net births/deaths model
• April Unemployment Rate4.3%Rounded figure unchanged from previous value
• Average Hourly Earnings YoY Through April3.57%Below 3.91% from the same period last year
• Non-Agricultural Sector Labor Income Share in Jan-Mar 202654.1%Record low since records began
• Total Tax Rebate Amount Year-to-date$330 billionApproximately $49 billion higher (+17%) compared to the same period last year

Impact & implications

The report argues that the current structural characteristics of the labor market significantly impact the U.S. inflation outlook and political economy direction. With weak worker bargaining power, firms hold stronger pricing power. Cost shocks such as oil price hikes are more likely to directly erode consumers’ actual purchasing power instead of fueling a wage-price spiral inflation dynamic. For firms’ profit margins and the Federal Reserve’s efforts to control inflation, this could be good news, but it exacerbates the economic burden on ordinary households, making 'affordability' a central issue in midterm elections. If productivity gains from AI investments primarily benefit capital owners, it will further aggravate income inequality.

Risks

• Rising gasoline prices may erode consumer purchasing power without compensation through wage negotiations
• Household debt and default rates are expected to rise in Q1, with increased default risks for low-income borrowers
• April inflation data may strengthen the Federal Reserve’s hawkish stance
• Employment indicators remain fragile, with concerning private sector job growth after healthcare

What to watch

• Pending home sales data for April released next Monday
• April CPI data and NFIB small business optimism index announced next Tuesday
• First-quarter household debt and credit report公布 next Tuesday
• Professional predictor survey updates on long-term inflation expectations
• Further statements from Federal Reserve officials on risk balance