Labor share is chopped liver to Mr. Krugman
When someone is not being noticed, there’s the saying, “What am I? Chopped liver?”
There is something that Paul Krugman is simply not noticing.
First, let me quote Mr. Krugman from his recent post, The Depressed Economy is all about Austerity.
“I don’t want to pretend to spurious precision here. Instead, I just want to make the point that given what we know and have learned about macro these past five years — and given the modest recovery that has taken place — we’re now at a point where, to repeat, to a first approximation the depressed state of the economy is entirely due to destructive fiscal policy.”
It’s at this point that labor share of national income which has dropped 5% since the crisis says to Mr. Krugman, “What am I? Chopped liver?”
Mr. Krugman by using the word “entirely” simply has no appreciation, no conceptual importance, no apparent model, to say that labor’s fallen share of output income is depressing the economy. … Wow
To me this is another character-defining moment of Mr. Krugman, who once said that living wages were not an economic issue, but a moral issue. He now seems to be saying that low labor share is a moral issue, not an economic one. Again Wow…
I do not know what is in Krugman’s mind. But isn’t it possible that “destructive fiscal policy” is what is causing low labor share, or at least preventing it from increasing?
Trying to be constructive, I think effective demand has to be related more clearly to types of policy actions, which can be related to higher-level policies (like “austerity”). Otherwise, the effective demand concept and the austerity concept seem to be on different planes of conversation.
Dean Baker, who is read by Krugman, gives us part of their view about why they are not as worried as you. If more jobs means better jobs, then decreasing unemployment leads to higher labor share.
I am not sure they have the whole story, though. I have been thinking lately about how does the economy grow. If you create a simple single good model, (Krugmen like simple models), then it seems to me that increasing producivity will always shift income away from wages. In order to get increasing wages, you need inovation – you need new things which will allow laborers to be paid more than enough to increase their consumption.
How do you earn enough making widgets to be able to pay the workers enough so that they can buy widgets. I do not see how to make a simple model – it breaks.
You improve the throughput of Material requiring less Labor and lower Material Cost. The remaining Labor should benefit from increased Wages from the Productivity Gains. Over 30 years, Productivity Gains have been skewed to Capital and the upper 5% of Income at the expense of Labor.
i am not Ed, but if I understand your question, I think the idea is that if you are making widgets and pay your employees more than a subsistence wage, they will buy things from OTHER businesses. Also those businesses will have to compete with yours for workers, driving up wages generally.. so eventually lots of people can afford widgets.
and other things.
I can’t see how increasing productivity shifts income away from wages.
We are seeing a type of austerity in the private sector… low wages.
Fiscal policy is meant to increase consumption. Low wages lead to low consumption.
So effective demand and austerity are on similar “planes of conservation”. (cool term)
Arne & Coberly,
Dean Baker wants full-on stimulus from monetary policy and fiscal policy. He sees a bright future the more the economy will grow. He has no understanding of an effective demand limit being an obstacle to that. Neither does Krugman for that matter.
This view of effective demand is new. We are in the midst of an experiment. This will be the first time that real GDP has hit the effective demand limit so far away from the CBO potential GDP.
I expect real GDP to react. When it does, it will be an eye-opener for many economists. We have a simple equation to predict the effective demand now. It is going to be tested.
Dean Baker has said that he likes to say, “I told you so.” He is aware of the effective demand equation and predictions. I had a brief conversation with him on twitter.
We will see. The effective demand has a good track record for previous recessions…
But just by creating more jobs, one thinks that labor share will increase. Keep in mind that labor share tends to rise as the economy is turning the corner to an economic slowdown or recession.
I think I am on your side, but you are talking in abstractions that make no sense to me.
I would imagine that “by creating more jobs” you could not help increasing labor’s share. Unless of course you created the jobs by taxing labor. which, i think, is generally not the case.
as for the counterintuitive “labor share tends (?) to rise as the economy [goes into] a recession: I would imagine that happens, if it does, because capital’s share has declined first… before the layoff’s start. In any case if you want to be understood, you have to actually offer an explanation.
If an economy is just based on widgets, no matter how many kinds, it is not going to work. If I make $100M worth of widgets, I can only sell them is consumers are willing to by $100M of widgets. But if all they can do is make widgets (yes, I know it is too simple a model), then they won’t have $100M because the manufacturer cannot pay them $100M to make $100M worth of widgets. It is a model of a broken economy.
Consider an oil driven economy. It costs less than $100M to extract $100M worth of oil. (If there were no other goods it would be another broken model). In the presence of something to buy, this economy can grow.
Consider a corn driven economy. Again it costs les than $100M to produce $100M. Unlike the oil driven economy, the demand will saturate.
Consider a financially driven economy. We can sell each other insurance, derivatives, securitized mortgages, and more. This economy can grow until someone notices that none of it is worth the paper it is written on.
I think that oil and finance has allowed us to build a workable widget economy. But widget making does not provide jobs that lead to increased labor share. The economy cannot recover by just building more widgets. The workers cannot be paid enough.
I left out making widget making machines. As long as demand for widgets is increasing, making the machines that make widgets is a growth contributor. That is why I say innovation can also lead to economic growth.
Ed is certainly correct that labor share needs to increase. The crappy jobs that Dean Baker is bemoaning are reducing labor share. But creating better jobs requires not just more of the same stuff, it requires new stuff.
“Consider a financially driven economy. We can sell each other insurance, derivatives, securitized mortgages, and more. This economy can grow until someone notices that none of it is worth the paper it is written on.”
To state the obvious, what you are suggesting is an economy which has growth to it in the form of Profits without Labor Input.
Lets look at your last statement, crappy jobs do contribute to Labor’s Share. What has made crappy jobs worst is the innovation in Capital or more Capital improving throughput and reducing Labor for crappy jobs has not resulted in Productivity Gains being passed to Labor as a result of the improved Material throughput and less Labor. As Spencer and other economists have pointed out the Productivity Gains have been skewed to Capital rather than Labor over the last 30 years. Primarily, I would believe, is why Labor’s share has decreased in Wages.
Going back to your italicized statement above, Capital has found a way of investing Capital and creating greater profits without the utilization of Labor. We do not even want to tax the profits (or the Capital) resulting from the investment what would have been given back in the form of Labor payroll wages, payroll taxes, and income taxes. Hope that makes sense.
Think of inflation… as money increases through the economy, output is increased instead of prices. But there comes a point where output hits a limit but money increases through the economy. The result is inflation.
This describes the LRAS curve.
At the same time, profits are rising as output increases. Profits will level out, or be “maximized” as Keynes might put it, when output starts to level off. This is the moment that you have inflation, but it is also the moment that you have rising labor share. Rising labor share complements inflation. But it is too late at that point, output and a rising profit rate have hit their limit. The economy is already turning into a contraction.
Keynes talks about this in chapter 22.
Rising profit rates make some businesses stay in business, but once profit rates start leveling off, these businesses have problems.
The effective demand limit describes the point when profit rates maximize.
Check out the profit rates in graph #2 at this post…
I will post a graph showing aggregate profit rates and labor share. Let’s see if that helps.
Note: Even though there was not an official recession in 1987, there were global problems in the financial sector that were affecting the economy. I graduated with my second degree right into the middle of the 1987 downturn.
Maybe I’m missing some point regarding “effective demand” and what is loosely being referred to as the economy. What seems to be missing from the points being made in Ed’s post and the related comments is the reality of what had been referred to by Clintonites as the global economy. I don’t see that term being used in discussions of how to improve our own portion of that global economy. Maybe the concept of the global economy is passe, out of favor or out of style. On the other hand the global economy is the reality from the perspective of corporate America, which in fact is no longer American. It is global. And the source of labor is also global. The national economy seems secondary to the global perspective of what is now the formerly American corporate system. Maybe the global corporations are satisfied to be part of a five percent global economy.
There is no “depressed” economy. Labor share has been replaced by debt.
long time ago Zeno created a paradox in which Achilles could never catch the Tortise. The paradox was based literally on a framing error… Zeno invited his hearers to consider only those frames (think of a movie film frames) in which A had not yet caught T… by continually producing a new frame that was still short in time of the A catches T moment. This fact was overlooked by the hearers, and by two thousand years of philosophers since.
I think you, and Lambert, are creating this kind of paradox. It may well be that the mighty brains of “capital” create that kind of paradox for themselves by disinvesting when their profit “share” starts to fall even though real profits do not… I don’t know.
But in the meanwhile… pay workers more and they will spend the money drawing new widgets or services into the market and you will get growth. There are limits to this, of course. Too much “money” in the system before production can catch up will simply cause inflation, which… after a point.. becomes disruptive. And if the money goes to people who already have too much, it will just get spent on gambling schemes… which is the economy we have now.
So don’t talk yourself out of increasing employment, or wages, because you have a graph that “shows” them leading to recession. The recession has other causes.
As for Run and the auto companies… I think their “excess production” was in excess of a demand limited by the poor quality of their product, and ultimately by the declining ability of workers to pay the higher prices for gadgets-in-cars, while paying for the fraud the bankers were subjecting them… and the economy as a whole…to.
No, it is done by design to max out the capacity of the plant(s). They definitely do not build to demand for a particular style or a particular order. They have not done anything of that type of planning since the sixties where you might wait 2-3 weeks for your car to show up. Pretty much since the new auto year started ~ September 2012 they have been building to inventory which is usually set at 80-90 days of anything and everything. Come later in 2013 and early 2014 you will see all the dogs (color, plain janes, loaded up whales, V-10s, etc) up for sale with discounts (and even bigger discounts if you start to bargain). They cover their fixed costs and they are happy.
Coberly, where on this thread did I mention automotive? Don’t carry over from one thread to another.
the threads look related to me. can’t imagine your objection.
nor can i see that you are disagreeing with what i said on this thread. i think on the other thread i might have suggested that capital flees a market with low rate of return even though absolute return is quite good. if that is not the case, then great, but then it becomes harder for me to understand what lambert is saying.
This is nt a class action lawsuit where we combine discussion points. Different topics.
i wonder if you are forgetting that the costs of the widget not attributed to direct labor are nevertheless paid to labor in the materials and products bought outside the firm. also, the labor of the boss, while it may be called profit, is still income that will be used to buy widgets from someone.
i think it all balances economy wide… or not, there are a few holes in the bucket, but not, i think, the one you were worried about above.
“crappy jobs do contribute to Labor’s Share”
If a job pays $0.70 for each $1 contributed to GDP, then it is a drag on labor share. Adding more jobs of this type will make the demand problem worse. It contributes to reducing Labor’s Share.
We are not discussing magnitude. Does it contribute or doesn’t? It does contribute although it might reduce overall impact. This is a different argument.
My hypotheitical widget-only economy is broken – it can’t work, but my concern is that our consumer goods driven economy is getting closer to a broken widget-only economy.
Baker and Krugman assume that GDP should continue to grow on the old trajectory, but that growth requires that the part of the economy that comes from producing new types of widgets is just as active in the future as it was in the past.
Yes indeed, Krugman doesn’t care about labor’s share and never writes about it http://bit.ly/1fLMCr1