Labor Share vs. Fiscal and Monetary Policy
Yes, demand is high for safe assets and this is in part driving down interest rates.
Labor share is the key to solving the issue.
Briefly…
Labor share is fallen in the US and other advanced countries, including China. Inequality of income has widened. The excess money at the top is driving the demand for safe assets over its supply, and this is pushing interests rates down.
No matter what stimulus you throw into the economy, monetary or fiscal, the money still circulates with the same labor share ratio. Money still concentrates at the top. Then the increased money at the top maintains demand for safe assets over supply and this further holds down interest rates.
The economy is at its level of output according to the labor share ratio. We are in a new normal.
Now if you want to go back to the old normal, then, labor share has to rise. Until such time, current monetary and fiscal policies will not work in a beneficial way.
New Labor share data came out today. It is still low. Here is the updated FRED graph.
“The economy is at its level of output according to the labor share ratio. We are in a new normal.”
Are you implying that labor share has stabilized at this lower level?
Warren,
I am implying that the economic output has stabilized at this lower level of labor share, whether or not labor share has actually stabilized.
You can imagine that economists have not seen this yet.
Warren,
Let me be a little clearer… economic output is rising at it should on a lower path consistent with the lower share.
I did not mean to say that output has stabilized.
Too bad. It got my hopes up.
Year over year employment has started to slow its increase, but it is still twice what is needed to accommodate population increase.
https://research.stlouisfed.org/fred2/graph/?g=2qJC
Whether labor share is growing or not, things are improving for labor because more people who want jobs are getting jobs. We are getting closer to where the official unemployment rate represents the number of people who want work, but we are not there. I think we are on a path that will lead to workers being able to be selective and get to a higher labor share. Just very slowly.
I like your analysis. One hears too little about labor share when it is an extremely important structural parameter in any economy. (As you note, most “multipliers” are modulated by labor share.)
I also like another part of your analysis. You note that there is a kind of inflation, price inflation of goods primarily of interest to those in the narrow high end sector of our economy. This is the only group that has been earning more money, and their rising demand for safe assets has bid down the return on safe government bonds. This isn’t what economists usually consider inflation, but high quality bond prices are just as subject to economic principles as anything else fungible.
While most people consider inflation to be relatively low, if you are extremely wealthy you can’t help noticing the rising prices of the kinds of things you are likely to buy. For example, the prices of high end real estate and fine art items have been on a tear. Even corporate equities have risen in price. Demand has outstripped supply, and prices have risen.
Calls for higher interest rates can be considered simple cries of inflationary pain.
EL – you look at your charts on labor share and say:
current monetary and fiscal policies
will not work in a beneficial way.
So how do you explain what is happening? The employment report was a blow out – 271k new jobs. Unemployment has fallen to 5% – we are at full employment. Hourly wages up 2.5% YoY – higher than inflation. But most important of all U6 (the broad measure of employment) is now below 10% – a level not seen since May of 2008.
What is it that you think is not working?
BK,
Efective demand wiened over the past year. Effective labor share rose in relation to the utilization of labor and capital. We now have a similar situation like last year where firms will hire more workers and increase labor hours in an effort to maintain profit rates. I have written about this before.
The dynamics that we are seeing are still end of the business cycle dynamics. Seasonal hiring is very high. This is a result of an effort to push the profit equilibrium point up.
On top of this is a trend that labor share is starting to inch up. This is a result of the dynamics toward the end of a business cycle. We would have arrived here with or without monetary and fiscal stimulus.
The key is to arrive at this point with balance in the economy. There are imbalances that will become more apparent as time goes on…