In this research of effective demand, labor share sets the limit upon utilization of capacity. That is the basic principle. However, labor demand is not the only demand for production. There is also foreign demand.
A country could see its domestic labor demand decrease, while foreign demand for its production increase. In such a case, it is conceivable that a drop in labor share would be offset by the rise in foreign demand. Keep in mind that foreign demand is normally a smaller % of GDP than domestic demand. Such that changes in labor share have more impact on overall demand.
I want to look at net exports as the % of GDP. Net exports represents net foreign demand. Exports is foreign demand. Imports is domestic demand for foreign production. The net of the two gives net foreign demand for production.
When imports are greater than exports, as in the US, we still have to have income to purchase the imports.
In the US, normally exports cycles around 80% the value of imports (Yellow line, right axis). Here is a graph.
It is true as one reads in the news that exports are increasing, but compared to imports, they are at a relatively moderate level looking at the past data. The reason is that net exports as a % of GDP went very negative since 2000. Imports greatly rose as a share of GDP. However, exports did pretty well keeping up with the great increase in imports as seen by the yellow line staying steady.
Through all this, do net exports recognize the effective demand limit as imposed by effective labor share?
Yes... They do. Here is a video showing it.
When capacity utilization hits the effective labor share limit, it also hits the "net export as a % of GDP" limit. As net exports became more negative, the effective demand limit dropped on capacity utilization. This makes sense in that production is reduced if we buy more goods from abroad.
So what is the connection between labor share and net exports? In the US, relative labor income not only drives domestic demand, but demand for foreign products too. consequently, demand for foreign products drives the export market in the US. More imports will mean more exports.
We saw imports rise faster than imports since 2000. Now we see exports catching up... but a lower level of effective demand. Capacity utilization is still lower because a fallen labor share is driving it down.
Some think that raising exports will raise utilization of capacity. But the graph in the video shows that utilization of capacity is limited by the effective demand limit as established by labor share.
Note: I am strictly describing data for the US.