Tuesday, December 19, 2017

I had a thought

Yesterday I showed "labor share" and "real" labor share (figured from inflation-adjusted values) together on a graph, set equal at the start by indexing, so we could compare the changes. Graph #4 from yesterday.

I'm adding two circles to that graph:

Graph #1: Labor Share, nominal (red) and real (blue), Indexed to 1947 Q1
On the red line, the circle shows the increase of labor share during the "Goldilocks" of the latter 1990s, and the return to trend after 2000.

Point of interest: On the blue line, the ratio of reals, labor share does not increase. It only runs flat. So, whatever it was that was happening in the latter 1990s, that's what was needed to prevent the decline of labor share.

What was happening in the latter '90s? Debt-per-Dollar (DPD) was rising rapidly, returning to trend after a decline early in that decade:

Graph #2: Debt per Circulating Dollar, Below Trend in the 1990s
The ratio is an Indicator of Financial Cost in the Economy as a Whole
As soon as DPD got back to trend in 2000, the rate of increase slowed. As soon as the rate of increase slowed, labor share fell.

What these graphs tell me is that, by the 1990s, our economy required an abnormally rapid increase in debt to prevent labor share from falling. In the 1950s, by contrast, a very slow increase in debt was sufficient to keep labor share running flat, and at a high level besides.

I'm gonna have to look into that.

I took the DPD ratio (blue on Graph #2), made it green, and put it on the graph with real and nominal labor share so you can get a better look:

Graph #3, Combining Graphs #1 and #2
The link gets you the series data, but FRED can't remember user-defined line settings
Oh and by the way, I slept on it. I don't see anything wrong with figuring labor share as a ratio of reals.

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