So why is it more profitable to hire now than employ more capital? More CEOs are saying they want to increase hiring and spend less on capital investment. (source) Why?
In a previous post, I showed how the derivative of the cobra equation shows that the profit potential has gone to zero... when the derivative is taken in terms of capacity utilization. But if the derivative was taken in terms of unemployment, then the profit rate potential has not gone to zero.
We see that there is still profit potential from hiring labor.
I can explain this by showing a plot of this equation...
The two blue lines with arrows show how profit rates change with respect to a variable. The vertical arrow shows that as capacity utilization increases holding employment constant, profit rates decrease. The horizontal arrow shows that as employment increases holding capacity utilization constant, profits increase.
Actually, the best way now to reach more profit potential is to increase employment of labor and decrease employment of capital. That path going Northeast gives the best profits.
This goes back to the equation for profit rate...
Profit rate = (Productivity – Real compensation) * Total labor hours/Capital stock
Increasing labor hours increases the profit rate. Whereas increasing the capital stock would decrease profit rates.
These expressions become more visible when the economy is up against the effective demand limit, because profit rates become a zero sum game.