Tag Archives: unemployment

In The News – May 31st, 2013



US Housing

Welfare State

Trade / Protectionism




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Effect of Interest Rates on Economic Returns to Labor v. Capital

A friend recently sent me a video titled “Wealth Inequality in America“, asking for my take on the matter. Unable to quickly demonstrate the Austrian view, I responded briefly and included links to several extant posts here.

Normally, I would walk someone through conceptual scenarios with different mixtures of labor and capital spend while varying interest rates to show how relatively lower rates “make early stage production activities more profitable” (Mises Daily, 4/21/2007). Instead, with Excel 2013 and the St. Louis Federal Reserve Economic Data (FRED) repository, I went looking for a few data series that showed my view of the relationship between interest rates and factors of production.

Using Wages + Salaries as a stand-in for economic returns to labor and Corporate Profits (after taxes) as a proxy for returns to non-labor (ie capital), I created the chart below.

In response to growing wealth inequality, I contend that two decades of relatively low interest rates are largely responsible for the increase in economic returns to capital versus labor. Because the vast majority do not hold claims against returns to capital, wealth inequality will grow until real time preferences are expressed in financial markets.

Effective Fed Funds Rate v. Ratio of Corporate Profits to Wages+Salaries
(1960 – 2012)

Interest Rates and Returns to Labor v Capital

Graph Summary: When the orange line is increasing, gains accruing to capital (in the form of corporate profits) are increasing faster than gains accruing to labor (in the form of wages and salaries). When interest rates (blue) fall, more economic gains accrue to capital than to labor.

The unfortunate irony is that while failing to achieve the case for interest rate manipulation (increased employment), it also transfers a greater proportion of economic returns to capital owners.

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Information Technology Spending, Interest and Unemployment

Over all, people will spend $3.6 trillion on information technology in 2012, the research firm said. This represents a 3 percent increase from 2011, when $3.5 trillion was spent…The increase, while modest, is notable because it is happening in the face of a financial crisis in Europe, slow growth in the United States, and a slowdown in China’s economic growth. – NYT Blog [emphasis added]

To the extent that interest rates are set below the natural interest rate, unemployment will increase as lower rates favor capital investment projects that directly replace labor. Information technology is THE modern form of capital. Like a building with a lifespan of 50 years, an IT project can produce systems/algorithms that will continue functioning (at high speed) for decades.

In theory, there is nothing wrong with capital replacing labor. The Austrian view is that technological advances (in early stages) increase interest rates as firms compete for capital to participate, allocating gains to savers (providers of capital). However, the our economy does not work this way.

An artificially low rate of interest, which might prevail for some time if the Federal Reserve is targeting a low federal funds rate, translates into the business world as longer planning horizons than are justified by people’s actual willingness to save. The policy-induced mismatch between production and consumption activities creates the illusion of prosperity but sets the stage for an eventual market correction, which takes the form of an economy-wide downturn. – Mises.org

Regardless of whether rates are below an unknowable natural rate; gains from these technology projects are not accruing to average, individual savers. Instead, three primary groups are capturing the gains given the current environment (where the Fed has used tools (QE, Twist) beyond simply targeting a low Fed funds rate to satisfy the Taylor rule):

  1. Highly consolidated firms with the scale to profit from high-technology projects and the ability to fund them (via access to cheap credit/equity markets)
  2. Large financial firms participating in quantitative easing and profiting on excess reserves held with the Federal Reserve
  3. Workers (labor) skilled in creating technological capital

The Phillips curve and other similar analyses are insufficient because they focus on the relationship between unemployment and wage inflation instead of the underlying monetary cause that directly effects capital costs and indirectly effects labor costs.

My contention is that an extended duration of below-natural interest rates has resulted in a rate of technological change and adoption that is a major factor in the high structural unemployment visible in the labor force participation rate and the mean duration of unemployment.

Bill Gross, manager of the world’s largest mutual fund, said U.S. unemployment is now a structural, and not cyclical, problem stemming from technology advances and the lack of retraining.

Rather than reducing unemployment, monetary stimulus leads to further substitution of capital for labor while allowing politicians to capture votes from those closest to the ‘spigot’.

Sources and Additional Reading

CNBC: More Jobs Predicted for Machines, Not People (Oct 24, 2011)
NYT Blog: Information Technology Spending to Hit $3.6 Trillion in 2012, Report Says (Jul 9, 2012)
Mises.org: Natural and Neutral Rates of Interest in Theory and Policy Formulation
Wikipedia: Phillips curve, Public choice theory, Rent-seeking, Quantitative Easing, Operation Twist
St. Louis Fed: Excess Reserves of Depository Institutions, Effective Federal Funds Rate, Labor Force Participation, Mean Duration of Unemployment, Unit Labor Cost
Econlib: Phillips Curve

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Skills Gap, Education Debt, and Unemployment

What follows is an update to my Feb 14, 2011 post Unemployment Duration and the Labor Market. Back then, Average Weeks Unemployed had just leveled off at a blissful ≈35 weeks. Now at over 40 weeks, businesses have open positions but unemployment is still over 16%, and growth in student loan debt shows no sign of abating.

However, I’m not advocating for student loan forgiveness. I have made significant sacrifices to live well below my means and it would be a travesty to see my selfish and profligate peers rewarded for not taking the same measures.

No, the real problem is real prices; to be addressed at length in the future.

WSJ: Why Companies Aren’t Getting the Employees They Need (Oct 24, 2011)

Some of the complaints about skill shortages boil down to the fact that employers can’t get candidates to accept jobs at the wages offered. That’s an affordability problem, not a skill shortage. A real shortage means not being able to find appropriate candidates at market-clearing wages.

Forbes: The American Nightmare: Student Debt Will Be A Long-Term Drag On The Economy (Oct 22, 2011)

Over the next decade the Bureau of Labor Statistics projects that the greatest number of employment gains will be made in low-wage industries not requiring a college degree. Nasser believes that education debt will place an additional drag on America’s low-wage, low-purchasing power future. For many, the debt will delay or put entirely out of reach things like owning a home or a car.

The Atlantic: Chart of the Day: Student Loans Have Grown 511% Since 1999 (Aug 18, 2011)

BLS: Average Weeks Unemployed

BLS: Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons

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Unemployment Duration and the Labor Market

While the headlines often report on the “official unemployment rate*” (U-3 Total unemployed, as a percent of the civilian labor force, seasonally adjusted), the average duration of unemployment tells us much more about the seriousness of conditions in the labor market. From January 2001 through December 2007, the mean Average Weeks Unemployed is 17.2 weeks; and on the graph below, one can clearly see how far we have departed from that benchmark.

Average Weeks Unemployed (blue line, left axis) and Percent Change Year-Over-Year** (red line, right axis)

Data provided by the Bureau of Labor Statistics (BLS)

Series Id: LNU03008275
Not Seasonally Adjusted
Series title:  (Unadj) Average Weeks Unemployed
Labor force status: Unemployed
Type of data: Number of weeks
Age: 16 years and over

For the current release only (which contains 5 months SA and 3 months NSA), visit Table A-12. Unemployed persons by duration of unemployment

*For alternative measures of labor underutilization, visit BLS Table A-15
**I initially looked at percent change month-over-month, but it seems more intuitive to compare year-over-year due to seasonality.

In the news:

‘Normal’ Unemployment Rate May Be 6.7%, Fed Paper Says, Bloomberg, February 14th, 2011.
Fed officials not attached to dual mandate, Reuters, January 9th, 2011

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