The limit of labor’s consumption rate
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!
America imports direct and indirect (embodied) labor. When our balance of payments renormalises, our labor imports will balance, causing a large increase in demand for labor and a consequent increase in wages.
Can you help me understand “capital income” and the things it purchases?
Originally I was thinking that CI pertained to businesses and the things they purchase, but I see I might be wrong. Rather, CI versus LI refers to the source of the income of individuals and households, not the nature of them. Have I got that right?
So, is the low percentage of consumption in CI households an artifact of their incomes being larger than LI households? Thus, they might be spending 10% of $3,000,000 rather than 90% of $40,000?
And also, CI incomes would be independent of the amount of labour they can offer, which we can assume with most people is more or less a constant?
Or, does your CI spending pertain both to households and businesses? Whereas LI spending pretty much has to pertain only to households?
The sun isn’t up yet here, maybe it will be clearer to me after sunrise. π
Noni Mausa,
Let’s say there is roughly $40 trillion of capital and the owners of capital roughly get 10% return on that to about $4 trillion per year. Much of that income is re-invested in capital, to maintain it and expand it. Keep in mind that many capital owners receive labor income too that they can use for personal consumption.
When you look at the circular flow of the economy, and you see the arrow paying income from firms to households, keep in mind that retained earnings are assumed into that arrow, but should not be. Retained earnings by firms are not income to households, but are kept as income within firms. In that sense, the traditional circular flow is wrong. Retained earnings are more than 50% of capital income. Retained earnings for the most part are held by the firms for investment in capital.
Even a portion of the capital income that goes to individuals as income is rolled over into other investments and not used for consumption.
Of the $4 trillion in capital income, I see about $800 billion to $1 trillion is currently being used for consumption.
Let me put another perspective on this. If there are roughly 25 million businesses in the US, and they are spending $800 billion on consumption, that is roughly $32,000 per business annually. When the economy gets close to a recession, that money is progressively withheld by businesses to weather the storm.