This excess rise in the capital-labor ratio highlights the negative effect of Federal Reserve
policy on wages and unemployment. The persistent, extremely low interest rates are
keeping real wages from climbing and retarding the rate of hiring. The Federal Reserve is
making unemployment worse than it has to be.
Putting on my macro hat, I would say that we are talking about too many endogenous variables here, meaning variables that depend on what is happening to other variables. The capital-labor ratio depends on investment and on hiring decisions. The real interest rate depends on supply and demand factors in the capital market. And so on.
In general, when investment is high, you might expect the demand for labor to be high. This could be because capital and labor are complementary. Even more, from a textbook Keynesian perspective, investment is spending, spending is economic activity, and more economic activity means more employment. The late 1990s exemplify this, with strong investment and a high ratio of employment to population.
Again, from a Keynesian perspective, one expects in a slump that hiring will be low, investment will be low, and real interest rates will be low. All of these are endogenous to whatever caused the slump.
Now, let me put on a PSST hat, meaning that I look at the economy entirely from a structural perspective, not from a Keynesian perspective. I would say that for the past fifteen years, we have seen both capital-labor substitution and factor-price equalization. Both of these require a reallocation of labor. This is not taking place very quickly. What are the reasons? Some possibilities:
1. Weak incentives for the unemployed to take jobs that require a loss of status or an adverse relocation. Older unemployed people can collect disability. Younger unemployed people can live with their parents.
2. Unusually few fast-growing firms. Perhaps entrepreneurs are not finding ideas that pan out. Perhaps when things pan out they are finding ways to grow quickly without adding thousands of workers (think of Internet businesses).
3. Perhaps the labor-leisure choice is being driven by attitudes about health insurance. If you really care a lot about health insurance, you take a job, even if you think that the take-home pay is barely worth it. The same deal gets turned down by someone who does not value health insurance. With the health insurance component of compensation so high these days, this can be important.