More on Weak Productivity & Labor Share of Income

There is a post by Dietz Vollrath, Labor’s Share, Profits, and the Productivity Slowdown.

D. Vollrath has some math there for how a decline in labor share along with a rise in aggregate mark-ups can show that productivity growth is slowing. Mark-ups are the price over marginal cost. Normally in perfect competition, price is equal to marginal cost, but D. Vollrath questions true competition in the economy. He puts forward that price is above marginal cost.

In the end of his post, he calls for lower mark-ups.

“Measured productivity growth tells us how efficiently we use inputs to produce GDP, so anything that makes measured productivity go up – better technology ({A}) or lower markups – is good for us in terms of producing GDP.”

Higher mark-ups and profit rates can rely on lower labor share.

So the solution is to break up market power of companies. Well… Labor also needs more power. We may as well raise labor share too.

My work in effective demand seeks to show that productivity is limited by labor share… such that if labor share falls, productivity becomes even more limited. Also near the end of a business cycle, there is incentive to lower unemployment to maintain profits (mark-ups) while holding capital utilization steady.

In June, 2014, I had a post about labor share,  productivity and profit rates. Profit rates tie to mark-ups. I gave some equations and some analysis…

Profit rate = (1 – labor share)*productivity * labor hours/Capital

Profit rate = (1 – unit labor costs/inflation)*productivity * labor hours/Capital

“Considering 4 things…

  1. Profit rates have peaked
  2. Labor share has bottomed out
  3. Productivity has stalled
  4. Capacity utilization is low

… increases in capital will not be made profitable by lower labor share as they have in the past. So, the key to profit rates now is to raise labor hours holding all else fairly constant. Thus firms have an incentive to hire in an atmosphere of controlled unit labor costs, stable inflation and constrained productivity. Unemployment is coming down but unit labor costs are being strictly controlled and productive capital investment is moderate.”

The forecast proved true over the year. Profit rates stayed steady. Labor share and unit labor costs have risen mildly since then. Capacity utilization stayed low. Inflation has been low and stable. Investment in productive capital has been moderate. Unemployment has come down as the best means to maintain profit rates.

The constraints of the profit rate equation above are being tested more and more as time goes on.

The conclusion of my post from last year still stands…

“Profit rates just simply went too high and labor share went too low. Bringing these back into a sustainable balance will trigger an unstable financial situation, which would likely produce a recession.”

The economy continues to walk the tight rope keeping a balance between high profit rates and low labor share. Giving labor power would just upset the balance right? It might trigger a recession… or maybe stock values might collapse. Oh wait, they already have and labor share is still low.

The economy is far from a healthy balance.