Via Suzy Khimm here is a chart on labor’s share of corporate value added.
It’s declining and quite frankly when I look out in the world I see pressure for it to decline further.
This means that real wages must fall. However, for real wages to fall inflation needs to rise. This is part of the problem that the developed world is facing generally.
In addition, this is why folks will be shocked when inflation begins to rise significantly before wages do. The are implicitly assuming this relationship will be stable but it will not be. Inflation will go into supporting ever higher corporate profits.
However, that dynamic is a real dynamic. Stopping it by tightening monetary policy will only spread the suffering and cause more unemployment and slower growth.
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Tuesday ~ December 6th, 2011 at 2:21 pm
Jonathan Stray
“However, for real wages to fall inflation needs to rise.”
Sorry, why is this? Plenty of industries have actually seen nominal wage cuts recently, and even when that’s not possible, you can always lose your job and get re-hired at a lower salary.
So I’m not quite seeing the logic here.
Tuesday ~ December 6th, 2011 at 2:52 pm
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[...] show that feds lied about how they managed the program. [...] Jon-Paul Modeled Behavior FeedThere Will Be Inflation, The Real World Is Nominal December 6, 2011Via Suzy Khimm here is a chart on labor’s share of corporate value added. It’s [...]
Tuesday ~ December 6th, 2011 at 3:54 pm
Becky Hargrove
I understood inflation as rising relative to the loss of income, as labor as a portion of production continues to decrease. Why is further inflation necessarily tied to greater corporate profits in this scenario? Is it because you associate further monetary easing with a continued drift to financial instruments rather than greater economic activity at local levels?
Tuesday ~ December 6th, 2011 at 4:54 pm
hambone1
The way I understand the argument, as labor becomes less crucial to corporate value added, the share of corporate income devoted to wages will go down and the share of profits will go up. Directly reducing nominal wages is extremely painful and politically damaging, so it will be decently hidden in a more general inflation. I think this is about how most effectively to handle the allegedly necessary fall in real wages, not a direct causal mechanism.
Tuesday ~ December 6th, 2011 at 5:20 pm
Axel
is there any case in which you would advise monetary tightening ?
I thought that when real wages are too high the economy suffers from ‘classical unemployment ‘, and in such a case money is neutral. why then would you want to create money?
Tuesday ~ December 6th, 2011 at 6:44 pm
engineer27 (@engineer27)
“I see pressure for it to decline further” — care to elaborate on that?
Wednesday ~ December 7th, 2011 at 12:30 am
Mike Johnson (@mikej77)
It is possible to impose internal devaluation of labor by simply cutting nominal wages administratively but this generates a lot of friction. Much easier to inflate the money supply while holding wages steady. This cuts everyone across the board.
What you would be looking for would be for auto assemblers to make the same rate of pay in China and the United States. So the value of the RMB will rise and the USD will fall.
So, look to the RMB compensation in China and use cross rates to determine what this is in USD. This is your “real” pay. If you are currently earning double the RMB rate we inflate the money supply until the USD level is the same as the RMB in constant terms.
China could try the same approach but since they are so close to subsistence already their ability to compress living standards is limited and so is their ability to inflate the money supply. The US on the other hand might be able to compress living standards by 2/3rds through inflation since US living standards exceed the Chinese by such a margin. So this is what will happen.
Wednesday ~ December 7th, 2011 at 9:21 am
Th
I think it is more likely prices will come down as wages fall. The only way we were able to have rising prices and stagnant incomes was increased labor participation and easy credit. Both are now gone so price cutters will lead the way to increased sales. We already see it in housing with house sharing and downsizing. Toyota cut the price on its new camry. I expect this to be the trend.
Monday ~ January 23rd, 2012 at 12:08 pm
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