In the equation for Effective Demand, effective labor share is determined by multiplying the labor share number, which is released by the Bureau of Labor Statistics on a quarterly basis, by 0.78. Why 0.78? In this graph, which started the research that lead to the equation for Effective Demand, you will see capacity utilization (total industry) plotted with labor share (business sector, 2005=100). There is a general tendency that they both decline together.

A central tendency line was regressed for this plot with a zero y-axis intercept. A zero y-intercept presupposes that as capacity utilization goes to zero, so does labor share. The story on that goes deeper and will be covered in another post. The slope of the central tendency line comes out to 0.78. Thus labor share (business sector, 2005=100) multiplied by 0.78 returns a value for capacity utilization that represents a central tendency. This central tendency turns out to be the key for understanding the dynamics of the equation.

For 4Q-2012, labor share stood at 95.222, which gives an effective labor share of 74.3% (95.222*0.78). Now labor share was said to be 57.8% at the end of 2010 (link p. 63). Why the difference in the numbers? The effective labor share represents a value for capacity utilization, not direct labor share.

Effective labor share is the value of capacity utilizaton along its central tendency with relation to labor share. Effective demand = cu(labor share). So let's look again at the equation for effective demand.

ED = real GDP * effective labor share/(cu*(1-u)) = real GDP * cu(labor share)/(cu*(1-u))

Thus, the equation is really taking real GDP and multiplying it by a ratio based on capital utilization rates as influenced by labor share of income and labor utilization. Let it be said now that this ratio does not want to go under a value of 1. A ratio under 1 would put effective demand under GDP (output). Business does not like this scenario, which has only been seen briefly and slightly since the 1960's.

Obviously, I will need to say more about this, as the whole story of the equation is not explained yet.

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