I want to compare Effective demand ED potential real GDO in the recessions of 1982 and the current one of 2009. The emphasis will be on how effective labor share changed in relation to capacity utilization. First, let's look at the current one. (Effective labor share and capacity utilization use the right axis.)
I want to direct your attention to the point towards the end of the crisis where capacity utilization rises to equal effective labor share. Do you see how capacity utilization takes a different path from that point? You will see it in the next graph too. It is a critical point in the recovery and marks the point from which real GDP will rise at normal rates. More in depth study is needed to understand the mechanism.
We can also see in the above graph that effective labor share eventually fell to a lower level as did capacity utilization. But we also see the same thing back in the recession of 1982. Here is what happened back in 1982.
So why did ED potential real GDP keep rising through the 1982 recession, but fell during the current one? One factor was that effective labor share fell more in the current crisis, which is now keeping the actual real GDP low. But that is not the only reason. You have to look at real GDP. There is a factor connected to real GDP (output) that has made it collapse just recently. Effective demand is weaker, yes, but there is something more happening within output.
The Effective demand equation does not explain the collapse internally of real GDP (output). The Effective demand equation only determines effective aggregate demand in relation to real GDP.
In short, something happened within real GDP to marginalize a good portion of it out of the economy. And now Effective demand is coming into balance with the new lower level of real GDP locking in the lower factor utilization rates.
I have an explanation for what is happening to real GDP based on the equations of Effective demand. Basically, a dead-weight loss has just occurred in the economy, which didn't happen back in 1982. And there are deep reasons for that. I will start posting the explanation of this soon, which will lead us into the economic growth model of Effective demand.
