One hears that high unemployment is structural. Then one hears that high unemployment is cyclical. Could a factor be low labor share of income affecting utilization rates of capital and labor? Well, let's look... Here is a graph of unemployment against the UT index since 1967. The red line shows data since 1Q-2010. The yellow line shows the transition to a higher of level of unemployment after the crisis. (The graph takes into account the recent downward adjustments in capacity utilization.)
The y-intercept of the linear regressions is where unemployment tends to be when the UT index reaches 0% total available factor capacity. The y-intercept of the linear regression can be seen as the natural rate of employment when effective aggregate demand is equal to aggregate supply. We can see that after the crisis, the natural rate of unemployment rose to a higher linear regression.
The UT index is heading toward 0%. According to the graph, unemployment would be 7.3% when the economy reaches maximum utilization rates of labor and capital.
So how did this happen? ... The answer lies in the equation for the UT index (UT = effective labor share - (utilization rate of capital*utilization rate of labor). Effective labor share has fallen to new lows after the crisis, from past levels of 80% to 74% currently. The consequence is that if the utilization of capital stays high relative to low labor share, then the unemployment rate is forced higher to keep aggregate supply from rising above effective aggregate demand. In other words, in order for the UT index to remain positive unemployment is forced to a higher natural level.
The graph above helps my prediction of how low unemployment will go before the next contraction. Currently the unemployment rate is heading towarding a lower limit above 7%.
