How much of their income do labor and capital use for consumption of finished goods and services? Now, if labor and capital do not spend their money on consumption, they either save it or pay taxes. In the case of labor, whose rate of consumption is very high, they have less and less income available for saving and taxes as the years go by.
On this labor day, we can see the divide between labor and capital.
Currently capital income’s consumption rate (blue line) looks to be heading back up to the previous high of 27% seen back in 1965. After 1965, capital income’s consumption rate declined to 0% by 1980. During that time, labor increased its use of income for consumption from 65% to 75%. We might assume that consumption moved from capital income to labor income.
We now see that capital is once again using income for consumption. Eventually, capital will reverse this trend and lower its consumption rate. Will labor income compensate? Will consumption be able to move from capital to labor income?
The problem is that labor income is already pushing its consumption rate to 85% of its income. Could that rate climb even further to above 90% on a sustainable basis? The result would probably be a negative personal savings rate for labor.
Labor income has been pushed to a limit. If labor income is using over 90% of its income for consumption, where is there room to increase taxes on labor, or even expect their savings rate to increase?
The upward trend since 1969 of labor using more and more of its income for consumption will have to be reversed or at least stopped. We have all heard that real wages have stagnated. Labor income has been subdued and pushed to a limit. Its back is up against the liquidity wall. Do we know where the snapping point is? The next recession could push labor income beyond a snapping point.
How is this situation going to be resolved, so that labor income will have breathing room to save money once again? or do we just allow labor to go under the control of capital?
Happy Labor Day!