Yves Smith at Naked Capitalism showed concern over my last post on rising labor share…
“In reality, it’s even worse than that. I hate criticizing writers whose work I generally like, but as a contrast to this talk, I suggest you look at a new post by Ed Lambert at Angry Bear. In it, a left-leaning blog (and remember, Angry Bear has been vigorous in its defense of Social Security), we see an strong argument against having workers get a better deal. Why? It will lower corporate profits, which will lower asset prices and give the confidence fairy a sad. I am not making that up. This shows the degree to which liberal economists have been intellectually captured by the orthodoxy and/or have been inculcated to live in fear of the Market Gods. If you can’t get parties who are ideologically sympathetic to argue for real remedies rather than a “recovery” only for the top tier, how can you possibly exert any pressure on the minions of the 1%?”
Her concern is that we should not fear negative economic consequences, like a recession, from fighting for better wages.
I was defended by the New Deal Democrat who explained very well what I was saying.
For Yves, I must make a distinction between minimum wages and labor share. Raising labor share is different from raising minimum wages. Minimum wages can rise without a substantive rise in labor share. Yet, rising labor share reflects better incomes more widely across the income spectrum. I am completely in favor of higher minimum wages and I am in favor of a higher labor share. Yet, higher minimum wages will not trigger negative economic consequences like a higher labor share would. Higher labor share directly shows that profit rates are coming down. Higher minimum wages would not show that in my opinion.
So we must fight for the workers who make close to minimum wage. The gains outweigh, if at all, any negative economic consequences.
Yet, we must be sensitive to changes in labor share, which directly effect profit rates and thus asset prices. Keynes implied in his description of effective demand, that the business cycle reaches its end at full employment when profit rates maximize in the eyes of the entrepreneurs. So if rising labor share reflects a maximization or even fall in profit rates, I would conclude that the end of the business cycle is coming.
One issue that I did not bring up in my previous post is this… If labor share starts to rise, the door will open to increase productivity by raising the effective demand constraint upon productivity. So labor hours would not have to be curtailed if labor share rises. However, you get a conflicting situation of rising productivity and rising unit labor costs, as labor share rises. Unemployment can continue to fall in this situation. Eventually the rising labor costs overpower rising productivity and extra labor hours. The result is that effective demand per labor hour will rise faster than output per labor hour. This situation has always been a precursor to a recession in the past.
It is generally accepted, I think, that workers tend to get their biggest gains toward the end of a business cycle. You see more wage inflation and lower unemployment. Yet, a recession will eventually bring this moment to an end. The longer the recession can be avoided, the better it is for workers and their wages. Yet, and I think Yves will understand this, when there is a high degree of financial instability, it is easier to trigger a recession at the end of a business cycle. And there appears to be more financial instability and sensitivity at the moment. Also, rising unit labor costs at the end of a business cycle can be offset by rising inflation. Yet, we have well constrained inflation expectations, so inflation will not likely permit much of a rise in unit labor costs.
So we should not fear negative economic consequences in fighting for better wages for workers. We must eventually overcome any and all obstacles.
Two other points to bring up in this issue…
- Yves’ post referred to a video by Dean Baker and Bob Pollin. At one point they said that they do not understand why unemployment has come down so fast. One explanation points to labor force participation, but another explanation is given through the equation that I gave in my previous post. Profit rate = (1 – unit labor costs/inflation)*productivity * labor hours/Capital Increasing labor hours will increase profit rates when unit labor costs are controlled and productivity is constrained. So there is currently an incentive to increase hiring. Thus we see an acceleration of hiring. But why do we see an acceleration now and not before? Well, labor share was falling after the crisis. This means that unit labor costs were low or falling. So profit rates rose without having to increase labor hours through faster hiring.
Once labor share stopped falling, profit rates had to look for another variable in that equation in order to keep rising or at least not fall. The answer was not inflation because mildly falling inflation cuts into profit rates. Profit rates found increasing labor hours as the answer. Labor hours have been increasing steadily at around 2% annual rate from quarter to quarter. So labor force participation has its effect on lowering unemployment too.
Yet, we will see an effect to slow down hiring if labor costs rise too much. If labor costs rise, not from higher minimum wages, but from higher labor share, growth in labor hours will slow down to preserve profit rates and asset prices. A recession may not start at that time as long as profit rates can be maintained.
- I send out one idea to the New Deal Democrat… who said…
“While a decrease in stock prices would create a negative wealth effect, the increase in consumer spending by Labor would likely more than make up for that (since Labor spends more of its income than the wealthy).”
I do not agree with this, because capital income is now spending over $900 billion (real $) at an annual rate. This is much more than they have spent in the past. Before the crisis, they were only spending $500 billion (real) at an annual rate. So it is conceivable that capital income could cut their spending by $100 to $300 billion (real) at an annual rate without too much trouble. Just slow down stock and asset prices. Make capital income go into preservation mode. So labor share would have to rise from 74% to over 75% (effective rate), just to keep real consumption from falling. Labor share would then have to rise to 76% just to see an increase in consumption. But what if capital income cuts another $100 billion from their consumption? They are still spending more in real dollars than they did before the crisis.
It’s a tricky economic situation at the moment… but we must still fight for higher wages, even if it triggers negative economic consequences. And then we must continue to fight for better wages through the next recession and after. And keep on fighting with the long run goal of getting labor share back up to over 80%.