Is labor reaching its limit in supplying its labor?
The graph implies that as labor share falls, labor is less inclined to supply its labor… and the natural rate of unemployment rises. (link to Fred graph)
Since 1947, the unemployment rate falls to a level consistent with implied supply & demand limits set by labor share. The US now seems to be reaching the implied supply limit with a low labor share index around 98.
- Will the plot line end up respecting the implied supply limit of labor?
- Will the unemployment rate continue to fall only as long as labor share does not trend downward?
Interesting chart, but it’s really hard to make any sense of what’s happening in it. Is there perhaps a way to highlight recessions, so we can see where they start from?
Jeremy
You can go to the link for the graph and play around with dates so that you can see different time periods.
The slope of your bounding line is based on the minimums reached for unemployment in 2000 and 2007 and today. Not statistically meaningful. If the housing bubble had lasted longer your line would be steeper.
Arne,
The unemployment rate bottomed out in the 4th quarter of 2006 and began rising in 2007. Even if the housing bubble had continued, unemployment was not dropping. Unemployment had reached its bottom a year before the recession started. In that sense, it is reasonable to think that unemployment had reached its natural rate for that business cycle.
Edward,
Housing starts started dropping in Feb 2006. Vacancy rates, prices, etc were telling people to stop building, but if the housing bubble had continued, unemployment would have kept dropping.
I think it is reasonable to say that because of the bubble we went past the natural rate, but that assumes you can say bubbles are unnatural. The same is true of your data points near 2000 – just a different bubble.
I think you are right to look for a correlation between labor share and employment, but I question whether graphed data produce a meaningful boundary.
Arne,
The other side of it is that capacity utilization peaked in the first quarter of 2005. That was a year before housing starts started to fall. That is a sign that the bubble was hitting natural limits, not unnatural limits.
And I am watching the graph above. How far will unemployment drop to push the plot beyond the supply limit that I drew. It will be interesting to see in hindsight.
It is interesting to realize how blind we can allow ourselves to be even with the aid of hindsight. An awful lot of people think everything was fine well into 2008.
Arne,
Good point…