In a previous post, I found an equation for the center of the business cycle, potential real GDP. In that equation was the variable g.
Center of business cycle as % of productive capacity =
T * (1 + g * (1 – c/e)) ….. or ….. T * (1 + g – g * c/e)
T = capital utilization x labor utilization... c = capital utilization... e = effective labor share... g is a variable between 0 and 1.
I wrote that the variable had declined over the years. Here is a graph showing its precise decline.
The decline has been consistent and polynomial. The g variable is a result of the business cycle amplitude being constant over the years at roughly around $200 billion (2009 $$).
Yet, it is interesting to see that a low g variable infers a dynamic preference for the utilization of capital over paying labor more. However, the utilization of capital is pushed downward by lower and lower rates of labor share due to demand constraints.
Businesses will say that it is better to utilize capital and that lowering labor share helps lower costs. Thus growth in real GDP is being driven by lower labor share, lower costs and the utilization of capital. But the % of productive capacity being used by the economy goes lower and lower through the years.
Lower costs of production and lower demand are moving the center of the real GDP cycle lower as a % of productive capacity.
The US is finding it more profitable to use less productive capacity. Labor loses out, but corporations are people too, right?
Here is the difference between 1967 (g = 0.79) and 2013 (g = 0.21)...
The lines have reversed roles since 1967. In 2013, changes in capital have more momentum to raise the center of the business cycle. (blue line is steeper) We can see again an explanation why employment is slow to recover after recessions now and why capital utilization bounces back so quick. However, the overall business cycle center is lower. Labor share is much lower. Demand is more of a constraint on real GDP growth. Yet, businesses still seek more profit in holding wages down.