The 78%

He also takes 78% of the Labor Share value. That gives him a number he calls the effective labor share. I don't know how he came up with the 0.78 number.

- Yesterday's post

Ed Lambert's Effective Demand Basics: Capacity utilization adjusts with Labor share caught my eye. At the end of that post he writes:

The equation for the Effective demand curve is... Effective demand = real GDP * labor share/(capacity utilization * employment rate)... The final effective demand [in the example] above is ... ED = 990,000 * 90%/(90% * 100%) = 990,000. Thus effective demand equals real GDP output.

Well, I know I can find real GDP and Labor Share and Capacity Utilization and the Employment Rate at FRED, especially after looking into Lambert's graph yesterday.

And the claim that "effective demand equals real GDP" sounds like it wants to be tested. It also sounds like something that should be true, at least according my idea of effective demand.

Should be true. But the numbers are right there. Low hanging fruit, so to speak. So I plucked 'em, and made a graph.

Graph #1: Real GDP (blue) and the Effective Demand Calculation (red)

Oh... Well, they do run parallel. But they don't look equal. The red line (effective demand) is rougher than the blue (RGDP) line. I can overlook that. But the effective demand line runs consistently and substantially higher than the real GDP line.

How much higher, I wondered. And then I thought: Maybe that's why Lambert uses 78% of labor share. So I redid the graph to show it for 78% of labor share:

Graph #2: Same as Graph #1 but Using 78% of Labor Share

That's a lot closer. Maybe subtracting another percentage point or two would center the red line on the blue one, or maybe Lambert has other reasons for going with 78%.