In my last post I discussed my questions regarding a post of Edward Lampert over at The Angry Bear Blog where he complained about the drop in the distribution of GDP going to workers. While I certainly agree with him it's a problem I felt like it sounded like a left wing version of Tyler Cowen's Stagnation Thesis: was he saying that we should give up on growing the pie and just divide it up in an equitable way?
http://diaryofarepublicanhater.blogspot.com/2013/08/reading-kalecki-can-we-increase.html
I now see that I likely got this totally wrong, based on an earlier piece he wrote on August 6th that I hadn't seen at the time of the above post.
http://angrybearblog.com/2013/08/labor-share-affects-the-potential-of-investment-to-raise-gdp.html
What he's actually saying is far from dispiriting; his argument is that when the labor share of income drops it also at the same time reduces growth overall. He shows this in his Circular Flow model. So this is actually to my mind great news. We can actually improve distribution of income and raise overall income as well-which will benefit business as well even as it's percent share comes down.
In fact, Lampert says the bottom line is that if we improve labor's share of income, then monetary policy will work better. Now while I love this result, I'm still curious. Assuming his model is right-and I hope it is-why does income grow with a growing share of labor's income and fall with a falling share of labor's income? My guess would be that this cuts consumption. Is that it or is there more to it?
Mark Sadowski-a frequent commentator at Money Illusion who always has great links and insights-left some great comments on this piece. He points out that the height of labor's share of income was 1980 which correlates with the height of inflation. He suggests-and links to a study that asserts-that this is no accident. Not just the U.S. but the other OECD countries have all seen a drop in labor's share of income along with a drop in inflation.
"Although there are many reasons for the increase in inequality that we have seen in the US and in other parts of the world (regressive taxation, weaker unions, lower minimum wages, globalization, Skills-Based-Technological-Change (SBTC) etc.) the leading hypothesis for why there has been such large scale declines in the labor share of factor income is disinflation (i.e. tight monetary policy)."
"Disinflation during the eighties and the nineties was accompanied by a significant rise in the profit share of national income in most OECD countries or, equivalently, by a reduction in the labor share. This suggests that changes in the rate of inflation are non-neutral with respect to the distribution of factor income. The consequences of inflation upon inequality thus may largely be the indirect result of the effects of inflation upon factor shares. The mechanism by which this comes about is fairly simple. Accelerating inflation is correlated to falling unemployment rates, falling unemployment rates lead to greater labor bargaining power, and greater labor bargaining power is correlated with lower markups. Furthermore, higher inflation rates create greater price dispersion leading to greater competition among producers to limit markups. This hypothesis was tested with a panel of 15 OECD countries over the period from 1960 to 2000 and a robust positive relationship between inflation and the labor share was obtained."
http://pareto.uab.es/wp/2000/46000.pdf
http://diaryofarepublicanhater.blogspot.com/2013/08/reading-kalecki-can-we-increase.html
I now see that I likely got this totally wrong, based on an earlier piece he wrote on August 6th that I hadn't seen at the time of the above post.
http://angrybearblog.com/2013/08/labor-share-affects-the-potential-of-investment-to-raise-gdp.html
What he's actually saying is far from dispiriting; his argument is that when the labor share of income drops it also at the same time reduces growth overall. He shows this in his Circular Flow model. So this is actually to my mind great news. We can actually improve distribution of income and raise overall income as well-which will benefit business as well even as it's percent share comes down.
In fact, Lampert says the bottom line is that if we improve labor's share of income, then monetary policy will work better. Now while I love this result, I'm still curious. Assuming his model is right-and I hope it is-why does income grow with a growing share of labor's income and fall with a falling share of labor's income? My guess would be that this cuts consumption. Is that it or is there more to it?
Mark Sadowski-a frequent commentator at Money Illusion who always has great links and insights-left some great comments on this piece. He points out that the height of labor's share of income was 1980 which correlates with the height of inflation. He suggests-and links to a study that asserts-that this is no accident. Not just the U.S. but the other OECD countries have all seen a drop in labor's share of income along with a drop in inflation.
"Although there are many reasons for the increase in inequality that we have seen in the US and in other parts of the world (regressive taxation, weaker unions, lower minimum wages, globalization, Skills-Based-Technological-Change (SBTC) etc.) the leading hypothesis for why there has been such large scale declines in the labor share of factor income is disinflation (i.e. tight monetary policy)."
"Disinflation during the eighties and the nineties was accompanied by a significant rise in the profit share of national income in most OECD countries or, equivalently, by a reduction in the labor share. This suggests that changes in the rate of inflation are non-neutral with respect to the distribution of factor income. The consequences of inflation upon inequality thus may largely be the indirect result of the effects of inflation upon factor shares. The mechanism by which this comes about is fairly simple. Accelerating inflation is correlated to falling unemployment rates, falling unemployment rates lead to greater labor bargaining power, and greater labor bargaining power is correlated with lower markups. Furthermore, higher inflation rates create greater price dispersion leading to greater competition among producers to limit markups. This hypothesis was tested with a panel of 15 OECD countries over the period from 1960 to 2000 and a robust positive relationship between inflation and the labor share was obtained."
http://angrybearblog.com/2013/08/krugman-kalecki-injecting-to-escape-from-a-sub-optimal-reality.html#comment-250707
He then links to a great study. Here he quotes the abstract.
“We use results from the literature on the determinants of price-cost margins to derive an equation relating labor’s share of national income to the inflation rate (as well as to the output gap, the unemployment rate and the capital stock per worker). The equation is tested with a panel of 15 OECD countries. We obtain a robust positive relationship between inflation and the labor share. Our results suggest that disinflation is not distributively neutral, provide empirical support for the distinct concern about price stability shown by trade unions and employers’ organizations, and help explaining the negative impact of inflation on growth.”
The idea that disinflation harms the poor and middle income earners has been something I've long suspected.
http://diaryofarepublicanhater.blogspot.com/2013/02/is-inflations-social-menace-overrated.html
Now here' is some rigorous study that's been done that suggests this is in fact so.
http://diaryofarepublicanhater.blogspot.com/2013/02/is-inflations-social-menace-overrated.html
Now here' is some rigorous study that's been done that suggests this is in fact so.
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