The unemployment rate for November 2014 came out today... 5.8%. Let's have a little fun with that number by applying it to profit rate potentials...
The driving force behind the effective demand limit are aggregate profit rates. When companies have increasing profit rates, it is more difficult to have a recession.
I gauge aggregate profit rates in 3-dimensional space with the Cobra equation...
Profit rate = (U + C) - a*(U2 * C2)
U = (1 - unemployment rate)
C = Capacity utilization
a = effective labor share - 2.472 * effective labor share + 2
When I take the derivative of the equation, I can gauge the potential change of the aggregate profit rates. I take the derivative with respect to C.
d profit rate/dC = (1 - 2aCU2)
First here is the monthly plot of capacity utilization & (1 - unemployment rate) upon the grid for the profit rate equation. The plot is projected to November 2014.
So the plot is heading toward the effective demand limit. So profit rates would be expected to keep rising up to the limit, but they rise more slowly the closer to the limit. Here is the plot of the slope of profit rate potential according to the derivative equation above.
Profit rates had much more potential to increase coming out of the crisis with changes in utilization of labor & capital. The slope of the profit rate potential is now reaching 0%. Conceptually, it is now harder to generate profits. Profit rates would be a zero sum game now. If one firm raises profits, another must lose profits.
The last point of the plot is for November 2014, which is based on the 5.8% unemployment rate released today and a projected capacity utilization of 78.9% (the same as in October).
What would make the profit rate start to climb?
At this point, if we see no change in labor share, a fall in capacity utilization would represent more profit rate growth potential. The profit rate would be able to increase more and still stay within the effective demand limit.
I ask this question because of falling oil prices. We would think that profit rates will climb with lower oil prices. More money for consumers to spend. Less production costs of firms.
So will lower oil prices push the plot in the above graphs beyond the effective demand limit by increasing utilization of both labor and capital? We will see of course in time... but my view is that there is no more effective demand, inflation is more likely to decrease, and profit rates will simply be maintained a while longer. I am interested to see if capacity utilization will actually stay and/or fall below 79%.