Monetary Policy for Targeting Labor Share of Income?

I want to just put down some preliminary ideas about the idea of having a monetary policy to target a certain level of labor share of income.

1. Low labor share can make monetary policy ineffective. (See this post)
2. It is thus important to raise labor share of income when it is making monetary policy ineffective.
3. A healthy rate of effective labor share is 80% and above (for the United States). This rate allows for a viable monetary policy even in a deep slump.
4. A low labor share of income translates into a low Fed funds rate because labor liquidity needs support. Thus a looser monetary policy is needed.
5. The idea then becomes ... Would an even looser monetary policy raise the labor share of income rate?

We take the basic equation for monetary policy based on labor share...

Prescribed Fed rate = z * (TFUR²+els²) - (1-z) * (TFUR+els) - inflation target

z is a coefficient for an economies equilibrium level... TFUR is the product of labor and capital utilization rates... els is effective labor share (labor share: business sector, 2005=100, * 0.78)

Then we transform it into an equation that will target a specific labor share rate.

Labor share targeting = z*(TFUR²+(els - (els target - els))²) - (1-z) * (TFUR+(els - (els target - els))) - inflation target

In this equation, if we want a higher labor share, the Fed rate will be lowered to provide more liquidity. Likewise, if we want a lower labor share of income, the Fed rate will be raised to lower liquidity to labor.

Here is a graph comparing the above two equations since 1967. The blue line is the prescribed Fed rate with no adjustment for targeting a different labor share rate. The orange line incorporates the adjustment for the Fed funds rate to target an effective labor share of 80%.

Whenever effective labor share is below 80%, the orange line is below the blue line. Whenever effective labor share is above 80%, the Fed rate would adjust upward to lower liquidity. We can see that these adjustments over time could help labor share of income stabilize at 80%.

But...

Does looser monetary policy raise labor share of income? From what I see... no. There is no direct mechanism for increased liquidity to increase the labor share % of national income.

If there was such a mechanism, the above equation could be used to support that mechanism. However, the first order of business is finding a mechanism to raise labor share of income. If it cannot be found, monetary policy in the United States is dead. (see this post and this post).

It is thus imperative to find a mechanism to raise and stabilize the labor share to a healthy level for the economy. Ideally the mechanism would be tied to monetary policy so that the Fed funds rate could be adjusted to help acheive a target labor share. But the truth of the matter is that labor share determines the effectiveness of monetary policy, whereas monetary policy cannot determine labor share.

Comments

[NoniMausa]

"Does looser monetary policy raise labor share of income? From what I see... no. There is no direct mechanism for increased liquidity to increase the labor share % of national income..."

It can be done by lowering the costs of daily living for the average worker. To provide, for instance, a good public transport system can cut the average person's necessary income by $7,000 a year and also remove the element of risk that goes with owning a car. The cost of such a system is much less than the aggregate cost of all those cars. National health care goes even farther in that direction.

Those two initiatives together would raise the average US family's effective income by about $15,000 a year.

Now, I am not sure if these two changes would show in your calculations, but their effects surely would show up somewhere.

Noni