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Wage-led Growth: Concept, Theories and Policies

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The subprime financial crisis that started in 2007 and which became the global financial crisis challenges economists and policy-makers to reconsider the theories and policies that had gradually been accepted as conventional wisdom over the last thirty years. It is widely recognized that the global financial crisis has called into question the efficiency and stability of unregulated financial markets. This chapter argues that it has also demonstrated the limitations and even falsehood of the claim that wage moderation, accompanied by more flexible labour markets as well as labour institutions and laws more favourable to employers, will ultimately make for a more stable economy and a more productive and dynamic economic system.
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Conditions of Work and Employment Series No. XX
Conditions of Work and Employment Branch
Wage-led growth: concept, theories and policies
Marc Lavoie
Engelbert Stockhammer
INTERNATIONAL LABOUR OFFICE GENEVA
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Copyright © International Labour Organization 2012
First published 2012
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Wage-led growth: Concept, theories and policies
1
Marc Lavoie* and Engelbert Stockhammer**
* University of Ottawa
** Kingston University
1. Introduction
The subprime financial crisis that started in 2007 and which became the global financial crisis has
forced economists and politicians alike to reconsider the theories and policies that had gradually
been accepted as conventional wisdom over the last thirty years. As we write this however, at the
end of 2011, the Keynesian fiscal stimulus programs based on infrastructure expenditures and a
more generous support of social programs that were suggested by international organizations in
late 2008 were adopted only by a handful of countries and were rather short-lived. All the talk
now, at least in European countries, is about fiscal austerity policies and the belief that cuts in
government expenditures will magically lead to an increase in economic activity. Similarly, while
it is now generally recognized, in contrast to the financial market efficiency hypothesis, that
financial innovations and self-regulated financial markets are likely to be destabilizing and
endanger the real economy, little has been done in practice by regulators to restrain the excesses
of the financial system. We believe that the global financial crisis has also demonstrated the
dangers and limitations of another tenet of current conventional wisdom in economics, i.e., the
claim that wage moderation, accompanied by more flexible labour markets as well as labour
institutions and laws more favourable to employers, will ultimately make for a more stable
economy and a more productive and dynamic economic system.
1
The paper is part of the project ‗New perspectives on wages and economic growth: the potentials of wage-led
growth‘. It was presented at a session of the Regulating for Decent Work (RDW) conference, held at the ILO,
Geneva, July 6-8, 2011. We wish to thank participants for their remarks and questions, in particular Pierre Laliberté,
as well as Eckhard Hein and Simon Sturn.
4
The past decades have witnessed falling wage shares and a polarization of personal
income distribution in most (but not all) countries. Average wages and average labour
compensation have not kept up with productivity growth. Functional income distribution has
shifted at the expense of labour. In many countries personal income distribution has also
become more unequal, and wages and salaries themselves have become more polarized, with
high-end salaries taking an ever-larger proportion of earned income. By many measures income
inequality is worse than at any time in the 20th century (Atkinson et al. 2011). At the same time
economic growth processes have become unbalanced. Financial crises have become more
frequent; household debts have risen sharply; the household sector has become an overall
borrower while the corporate sector has become a global lender in the Anglo-Saxon countries;
international imbalances have increased, with some countries relying excessively on export
growth.
This paper argues that the polarization of income distribution and the decline in the wage
share play an important role in the generation of unbalanced and unequal growth. We believe
that these phenomena are, at most, only partially associated with technical change and changes in
the composition of output, and that the essential cause of the long-run evolution of income
distribution and its rising dispersion is the change in economic policies and in the institutional
and legal environment that has been more favourable to capital and its high-end supervisory
employees over the last thirty years or so. In other words, we do not think that the determination
of real wages or the wage share is a purely endogenous phenomenon. Income distribution can be
modified or influenced by appropriate government policies, that act both on primary income
distribution, for instance by reinforcing the bargaining power of labour unions or securing low
real interest rates, and on secondary income distribution, by modifying the tax code.
We believe it is time to reconsider the validity of pro-capital distributional policies, and to
examine the possibility of an alternative path, one based on pro-labour distributional policies,
accompanied by legislative changes and structural policies that will make a wage-led growth
regime more likely, i.e., pursue what we call a wage-led growth strategy, which, in our view, will
generate a much more stable growth regime for the future. This belief is shared by others, thus
leading to the organization of the current project, New perspectives on wages and economic growth: the
potentials of wage-led growth (henceforth, the wage-led growth project). This issue is particularly
important in view of the fact that the financial crisis has plunged many economies in recession,
thus further weakening the ability of workers to resist attempts to lower wages or real wages, and
hence with the consequence, at the macroeconomic level, of further reducing the wage share in
national income.
5
The advocacy of a wage-led economic strategy has a long history. It has been articulated
in reformist visions within the labour movement and was discussed under the heading of
‗underconsumption‘ in 19th century economics. Famous underconsumptionists in the history of
economic thought include Malthus, Sismondi and Hobson.
2
Underconsumptionist ideas got a
boost from their endorsement by Keynes, when he proposed his theory of effective demand,
arguing that excessive saving rates, relative to deficient investment rates, were at the core of
depressed economies. Underconsumption theories can also be related to the problems of the
realization of profit, as discussed by Marx and subsequently by various Marxist authors such as
Baran and Sweezy (1966), while other authors, closely related to Kalecki (1971), such as Steindl
(1952) and Bhaduri (1986), have brought together the theory of effective demand and the
problem of the realization of profit. On this basis, the benefits of a wage-led growth strategy has
been resurrected and formalized by several Kaleckian or post-Keynesian authors, starting with
Rowthorn (1981), Taylor (1983) and Dutt (1987). Taylor (1988) showed early on that when
emerging countries had enough capacity to adjust, a wage-led growth strategy made sense. More
recently, the policy-oriented concept of a wage-led growth strategy was prominently used by
UNCTAD (2010, 2011).
A standard objection to the consideration of the underconsumption thesis or the
consideration of problems related to the lack of effective demand is that long-run growth the
trend rate of growth, also called the potential growth or the natural rate of growth is ultimately
determined by supply-side factors, such as the growth rate of the labour force and the growth
rate of labour productivity. While adepts of the so-called endogenous growth theorywill
recognize that investment in human capital or research and development may end up modifying
the potential growth rate, they usually set aside the idea that actual growth rates could have an
influence on potential growth rates. Yet, since the advent of the global financial crisis,
government agencies and central banks in many industrialized countries have lowered their
forecasts of long-run real growth, thus demonstrating clearly that weak aggregate demand does
have an impact on potential growth. As Dray and Thirlwall (2011, p. 466) recall, it makes little
economic sense to think of growth as supply constrained if, within limits, demand can create its
own supply. This explains why we shall focus on the income distribution determinants of
aggregate demand, paying less attention to the supply-side factors.
The main objective of the present paper is to provide an accessible introduction to the
topic of a wage-led growth strategy for policy makers. Another important objective is to present
2
See Bleaney (1976) for a historical account of underconsumptionist theories.
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the overarching framework underlying the efforts of the authors of the other papers of the
project, thus also providing an introduction to the notions of wage-led and profit-led economic
regimes, in the hope that other researchers will adopt these distinctions and embark on the kind of
empirical research required to assess whether various other individual countries or regions are in
a wage-led or a profit-led regime.
In the next section, Section 2, we provide a policy-oriented framework for the analysis of
the interaction between distribution and growth. We will need to make a distinction between
distributional policies and a macroeconomic regime. It is important to make these conceptual
definitions and distinctions because they are not always obvious to non-economists. On the one
hand governments can pursue pro-labour or pro-capital distributional policies, which aim at
increasing or decreasing the share of wages in national income respectively; while on the other
hand we have wage-led and profit-led economic regimes, which are associated with the structural
macroeconomic features of the country under investigation. More technically, distributional
policies are about changes in the determinants of income distribution, while the economic regime
is about the effects of changes in income distribution on the economy. We will also see how
policies and regimes can interact to create either stable and high growth processes or whether
some combination can lead instead to slow or unstable growth processes.
In section 3, we shall examine why an economy would exhibit a wage-led economic
regime, looking both at supply-side effects, that is the relationship between the share of wages
and labour productivity growth, and at demand-side effects, which will be our main concern in
this section and in this paper. Section 4 provides a summary of some key empirical findings of
related to the question of wage-led versus profit-led growth It summarises the causes for changes
in wage shares, indicates the approximate size of some key effects on the demand side,
summarises the findings on the productivity effects, and discusses the emergence of the two
growth regimes that followed the generalization of neoliberalism, debt-led growth and export-led
growth. Both of these neoliberal growth processes have come with wage suppression and greater
income inequality.
Finally, section 5 argues that since the world economy as a whole is likely to be in a
wage-led regime, an economically sustainable process of growth requires the adoption of a wage-
led strategy, with pro-labour distributional and structural policies. This will generate a wage-led
growth process, which will ultimately be favourable to all concerned, including employers.
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2. Distribution and growth: A conceptual framework
The relation between distribution and growth had been at the centre of macroeconomic analysis
in classical economics, but with the dominance of neoclassical economics in the 20th century,
issues of distribution have occupied a secondary place, since income distribution was assumed to
be regulated by marginal productivity relations within a perfect competition model, with wages
for various occupations being determined by the pure market forces of supply and demand. But
such a mechanical model of wage determination and income distribution does not hold up in a
world where monopsonist features, imperfect competition and economic and social power come
into play.
3
In such a world, in contrast to the ideal world of market fundamentalism, market
forces do not produce optimum results and there is room for modifying income distribution. In
the following we offer a policy-oriented framework to analyse the relation between distribution
and growth. We start by contrasting pro-labour and pro-capital distributional policies.
2.1 Pro-capital versus pro-labour distributional policies
Income distribution is the outcome of complex social and economic processes, but governments
directly influence it by means of tax policy, social policy and labour market policy. As shown in
Table 1, we define as pro-capital distributional policies those policies that lead to a long-run decline in
the wage share in national income, while pro-labour distributional policies are policies that result in an
increase in the wage share. Pro-capital distributional policies usually proclaim to promote ‗labour
market flexibility‘ or wage flexibility, rather than increasing capital income. They include
measures that weaken collective bargaining institutions (by granting exceptions to bargaining
coverage), labour unions (e.g., by changing strike laws) and employment protection legislation, as
well as measures or the lack of measures that lead to lower minimum wages. There are also
measures that alter the secondary income distribution in favour of profits and the rich, such as
3
It has sometimes been argued that because several empirical studies of aggregate production functions have yielded
estimates of the output elasticities of factors that were consistent with the predictions of marginal productivity
theory under conditions of perfect competition (because these elasticities equated pretty closely the shares of wages
and profits), it was possible to conclude that markets behaved as if they were fully competitive. But it has since been
shown that this success was achieved because what the regressions of aggregate production functions are really
measuring are the wage and profit shares, not the output elasticities, as the regressions are in fact estimating national
accounting identities. See Lavoie (2007) for a review of this critical literature.
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exempting capital gains from income taxation, or reducing the corporate income tax. Ultimately,
pro-capital policies impose wage moderation.
Pro-labour policies in contrast are often referred to as policies that strengthen the welfare
state, labour market institutions, labour unions, and the ability to engage in collective bargaining
(e.g., by extending the reach of bargaining agreements to non-unionised firms). Pro-labour
policies are also associated with increased unemployment benefits, higher minimum wages and a
higher minimum wage relative to the median wage, as well as reductions in wage and salary
dispersion. While in the case of a pro-capital distributional policy, real wages will not grow as fast
as labour productivity, all else equal, with a pro-labour distributional policy, the wage share will
remain constant or will increase over the long run, as real wages grow in line with labour
productivity or exceed productivity.
Of course, there are also other factors influencing income distribution, such as
technological changes, trade policy, globalization, financialization and financial deregulation.
These factors have recently played an important role, but we will not elaborate on them here, as
we wish to focus on the interaction of distributional policies and economic regime.
Table 1. Pro-labour and pro-capital distributional policies
Distributional policies
Other factors
Pro-labour
Policies
Welfare state
Increase minimum wages
Strengthen collective
bargaining
Changes in technology
Globalisztion
Financialization
Results
Rising real wages
Stable (or ↑) wage share
Decreased wage dispersion
2.2 Profit-led versus wage-led economic regimes
So far we have considered the economic policies pursued by a government, which could alter
income distribution in favour of profits or of wages or the median wage. Next we consider the
following question: knowing that income distribution is shifting in favour of profits or wages,
what is the effect of such a shift on economic performance? For instance, if income distribution
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in a country is shifting in favour of profit recipients, does this by itself have favourable
consequences on aggregate demand in the short run, on the growth rate of aggregate demand in
the long run, or on the growth rate of labour productivity? If indeed this shift towards profits
has favourable repercussions on the economy, as we have just defined them, then we shall say
that this economy is in a profit-led economic regime. If not, if the shift towards profits has a negative
impact on the economy, then the economy is in a wage-led economic regime. By symmetry, we can
argue that economies that, all else being equal, experience rising wage shares that induce a
favourable outcome are part of a wage-led regime, while rising wage shares that generate an
unfavourable outcome indicate the presence of a profit-led regime. This is all summed up in
Table 2. At this stage, we do not attempt to distinguish between demand and productivity
effects, but only discuss the economic regime, assuming for the moment that demand and
productivity react in a similar direction to distributional changes. We shall tackle this issue in
more detail in the next section.
Table 2. Definition of profit-led and wage-led regimes
Overall impact on the economy
Expansionary
Contractionary
Income distribution
change imposed on
society
An increase in the
profit share
Profit-led regime
Wage-led regime
An increase in the
wage share
Wage-led regime
Profit-led regime
Whether an economy is under a profit-led or a wage-led regime depends on the
economic structure of the economy. It will depend in part on the existing income distribution in
the country, but also on various behavioural components, such as the propensity to consume of
the various income recipients, on the sensitivity of entrepreneurs to changes in sales or in profit
margins, and on the sensitivity of exporters and importers to changes in costs, foreign exchange
values, and changes in foreign demand, as well as the size of the various components of
aggregate demand consumption, investment, government expenditures and net exports. While
an economic regime also depends on the various economic structures and institutions, as well as
various forms of government policy, it should be clear that the nature of the economic regime as
defined in Table 2 is not a choice variable for economic policy in any straightforward sense. It
should not be understood as designed by economic policy, but rather as determined by the
institutional structure of the economy.
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We can now bring together the analyses of distributional policies and of economic
regimes, as shown in Table 3. Between the two sets of distributional policies and the two
economic regimes, four different combinations are possible. These do have quite different
properties. If pro-capital distributional policies are pursued in a profit-led economy, this will
result in a profit-led growth process. Inversely, if pro-labour policies are pursued in a wage-led
economy, this will result in a wage-led growth process. These are the two cells in the main
diagonal in Table 3. In both cases distributional policies and economic structures are consistent
with each other. However, if pro-capital policies are pursued in a wage-led economy or if pro-
labour policies are pursued in a profit-led economy, this will result in stagnation. In practice,
inconsistent distributional policies and regimes are also likely to evolve towards unstable growth
patterns as growth will have to rely on external stimulation.
Table 3. Viability of growth regimes
Distributional policies
Pro-capital
Pro-labour
Economic regime
Profit-led
Profit-led growth
process
Stagnation or unstable
growth
Wage-led
Stagnation or unstable
growth
Wage-led growth
process
Table 3 is useful in classifying different political ideologies as the four different
combinations allow us to classify many important arguments. Take the first cell (pro-capital
policies in a profit-led economy). This scenario, as shown in Table 4, corresponds to liberal
ideology and what is often called trickle-down economics. Policies more favourable to profit
recipients and to employers and their high-rank employees are said to lead to improved
macroeconomic performance. Under such a scenario, the average worker will eventually benefit
from wage cuts and harsher working conditions as higher profit margins will induce
entrepreneurs and executive officers to work harder and invest in more numerous machines and
more productive capacity, so that rewards will eventually trickle down to workers as well, in the
form of higher employment rates and higher purchasing power. This scenario could be called
‗neoliberalism in theory‘. It rests on the idea of a trickle down process whereby increasing profits
lead to virtuous cycle of higher growth that ultimately also benefits labour and the poor.
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Table 4. Actual growth strategies in the economic regime/distributional policies framework
Distributional policies and strategies
Pro-capital
Pro-labour
Economic
regime
Profit-led
‗Neoliberalism in theory
Trickle-down capitalism
Doomed social reforms
(TINA)
Wage-led
Neoliberalism in practice
Unstable, has to rely on
exogenous growth drivers
(debt-led growth or
export-led growth)
Social Keynesianism
Postwar Golden age
The cell that mixes pro-labour policies in a wage-led regime summarizes what many
economists (e.g., Marglin and Schor 1990) regard as a key characteristic of the post-war era. The
expansion of the welfare state (in advanced economies) led to a golden age of growth which was
favourable to both workers and entrepreneurs, as rising real wages generated large increases in
labour productivity and profits, until it was interrupted by the oil shocks of the 1970s.
The next cell (pro-labour policies in a profit-led economy) could be called ‗doomed social
reforms‘. It is the scenario that neoliberals claim would happen if progressive social reforms were
implemented. Margaret Thatcher‘s famous dictum, later repeated by several think-tanks and even
left-wing politicians, that ‗there is no alternative‘ (TINA), makes sense in this cell. Some Marxists
use a similar scenario to illustrate the futility of attempts to restore a more humane economy
within the capitalist mode of production. Within this cell, attempts to raise workers‘
compensation or the wage share inevitably lead to a slowdown of the economy, as such changes
in income distribution are inconsistent with the profit-led regime of the economy, usually leading
to their quick abandonment.
Finally there is the fourth cell, which combines pro-capital distributional policies with a
wage-led regime. We will argue that this describes ‗neoliberalism in practice‘ in several countries,
since two or more decades of pro-capital redistribution policies have resulted in a mediocre
economic performance relative to the performance achieved in the Golden age.
4
Furthermore,
4
Although some researchers would argue instead that reliance on free market mechanisms and
more flexible labour markets have generated large increases in world real income over the last
three decades (Balcerowiz and Fisher, 2006). But these authors forget to compare the last
decades to the evolution of the 1950s and 1960s. Harvey (2003) and Glyn (2006) offer insightful
discussions of neoliberalism in practice.
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this neoliberalism in practice has been accompanied by a heavy reliance on a bloated financial
sector or on external demand, which has generated economic and financial instability. The
reliance on these external drivers export-led growth and debt-led growth constitutes an
attempt to circumvent the slow growth inherent to the contradiction between the pro-capital
distribution policies being pursued by society and the intrinsic properties of an area under a
wage-led economic regime. More will be said about this later.
Thus far, we can conclude that if several countries, or if some regions, are under a wage-
led regime, then pro-capital policies that pertain to boost the spirits of employers will fail. These
policies will not generate favourable effects on aggregate demand and productivity. In a wage-led
regime, what we need instead are pro-labour policies, which will help generate sustainable
growth. In other words, in a wage-led regime, what we need is a wage-led growth strategy. What
we now need to examine are the factors that determine whether an economy is in a wage-led or
profit-led regime. And we shall see later still the results of a set of empirical studies on this
specific question.
3. Profit-led or wage-led economic regimes?
In this section, we wish to present the tools that will help us distinguish between wage-led and
profit-led economic regimes. Following conventional practice among researchers in the field
established since Boyer (1988), we will distinguish between demand regimes and productivity
regimes, although, as we shall see, the overall effects on aggregate demand and productivity
growth are interdependent. We will first deal with the demand side, emphasized by Keynesian
economists, since aggregate demand in this paper will be our main focus.
3.1 Preliminary microeconomic issues
In the mainstream model of the firm with perfect or at least pure competition, any increase in
the real wage leads to a reduction in output and employment, and the same effect will be
observed at the market level. The essential causes of this result are the assumption of profit
maximization and the assumption of diminishing returns. Higher marginal costs, at constant
prices, induce firms to cut down production and employment, in their efforts to maximize total
profits. However, what happens if we give up the assumption of diminishing returns? There exist
a large number of empirical studies, the most recent being that of Blinder et al. (1998, ch. 12),
that conclude that firms face constant marginal costs and decreasing unit costs up to full
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capacity. Thus, unless firms are forced to produce beyond full capacity, they will not operate
anywhere near an area of diminishing returns, operating much of the time around an area known
as the normal rate of capacity utilization, shown as qnormal in Figure 1.
What are the consequences of accepting the empirical relevance of constant marginal
costs with decreasing unit costs? They imply that, at a given price, firms will not impose self-
restrictions on the amounts that they produce. With decreasing unit cost, the more is being
produced and sold, the higher is the realized profit per unit, and hence the larger are the overall
profits made by the firm. There is no profit-maximizing constraint anymore that limits
production and employment. The crucial constraint is given by sales: it is an effective demand
constraint. Thus, even if unit costs are rising, say because the labour wage rate has risen, the firm
is still compelled to produce as much as it can sell at a given price. The crucial constraint is
demand, or the lack thereof. In general, higher real wages will not necessarily entail a reduction in
production and employment, unless the real wage is so high that it is not profitable to produce
any more.
5
Figure 1: Constant marginal costs with decreasing unit costs
q
qfull capacity
UC MC
MC
p
qnormal
pProfit per
unit
5
A good example of such a situation occurred when East Germany was reunited with West Germany, with the East
German mark being valued at par with the Deutsche mark. As a result, relative real wages faced by East German
firms were propelled up as they had to cut down their uncompetitive prices.
14
With constant marginal costs and decreasing unit costs firms are thus induced to produce
as much as they can sell (up to full capacity), since such a strategy will allow them to make more
profits. But if real wages rise, will firms be able to sell more or will they have to sell less? The
answer must be provided at the macroeconomic level. It involves the impact of higher real wages
on various components of aggregate demand, that is, the various components of gross domestic
product on the expenditure side consumption, investment, net exports, and government
expenditures. How will aggregate demand react to a change in income distribution, for instance
to a change in real wages? In what follows, until we deal with the supply-side effects, we shall
assume that an increase in real wages is associated with an increase in the share of wages in
national income and with a reduction in profit margins of firms.
3.2 Demand regimes
We start with a graphical analysis of the effects of an increase in the wage share (or in
real wages at constant labour productivity) on real GDP and on the volume of investment. For
simplicity, we consider a closed economy without government. We know that in such an
economy the short-run equilibrium level of GDP is given by the intersection of the saving and
investment functions. As is standard in Keynesian and Kaleckian economics, we assume that
saving (S) is a positive function of income. We further assume that investment (I) is a positive
function of GDP this is the so-called and well-known accelerator relation, which essentially
says that higher sales and rates of capacity utilization will induce firms to engage in more
investment expenditures. In Figure 2, the starting equilibrium is given by point E, at the
intersection of the S0 and I curves.
6
6
We further assume, as is standard in this kind of model, that investment is less sensitive than saving to a change in
GDP, i.e., that the investment slope is less steep than the saving function.
15
Figure 2. Effects of an increase in the wage share in the canonical Kaleckian model
q
qma
I
S0
S00 = I0
I, S
q0
Ia
qm
S1
E
S01 F
G
Let us now see what happens when there is an (exogenous) increase in real wages or in
the wage share. What will be the effects on the saving and investment functions? With respect to
the saving function, it all depends on the saving propensities (or their complements, the
propensities to consume). If the propensities to consume out of profits and out of wages are the
same, then the change in real wages will have no impact whatsoever on the saving function,
which is the standard assumption in mainstream models. In other words, for a given income
level, there will be no change whatsoever in consumption. However, if the propensity to
consume out of wages is higher than that out of profits, then the saving function of Figure 2 will
rotate downwards, to S1, meaning that less saving and hence more consumption will occur at the
same GDP level. Saving will drop from S00 to S01, meaning that consumption will have increased
by the equivalent amount at the given GDP level. This occurs because the redistribution of
income towards a higher wage share generates an increase in consumption expenditures, since
wage earners spend a greater portion of their income than profit recipients. A decrease in wage
dispersion, providing a greater share of income to the lower quintiles, would lead to a similar
result. Keeping the level of investment still for the moment, at its original value I0, we can see
that this increase in real wages will bring about an increase in real GDP, as GDP will move from
q0 to qm once multiplier effects are taken into account, the new equilibrium now being at point F.
These consequences are well supported by empirical evidence, which shows that the
propensities to save out of profits are much higher than those out of wages (in part because
firms by definition save all of their retained earnings) and which also shows that the propensities
16
to save of the richest quintiles are higher, as one would expect, than those of the poorest
quintiles.
7
These effects reinforce each other since wage earners generally are poorer than most
profit recipients. Capital gains on real estate and the stock market may reduce somewhat the
differential between the propensity to consume of wage earners and profit recipients, and this
differential will also be affected by the existing social security system.
The move from q0 to qm when real wages and the wage share are higher gives comfort to
the underconsumptionists. With higher wages and hence more consumption, GDP and
employment rise. However, a second positive effect may also arise, due to the accelerator effect,
underlined by Kaleckian authors and econometricians. Investment may also increase if
investment expenditures respond positively to the increase in sales and capacity utilization. This
is shown in Figure 2 with the move along the investment function, as the economy reaches its
new equilibrium point G, given by investment level Ia and output level qma. Thus so far, it would
seem that an increase in the wage share has a favourable impact on both consumption and
investment. This is the result that was obtained in the canonical Kaleckian models of Rowthorn
(1981), Taylor (1983) and Dutt (1987).
Investment, however, does not depend only on sales; it also depends on expected
profitability. While Kaleckian economists argue that expected profitability depends on past
realized profitability, Marxists and several other economists tend to claim instead that expected
profitability depends on the share of profits in national income, that is, on the profit margin of
firms, or more precisely on the profit rate that firms expect to achieve on their capital when
capacity is utilized at its normal rate (see Lavoie 1995, p. 795-800).
8
As higher real wages, all else
constant, imply lower profit margins and lower profitability at the normal rate of capacity
utilization, it implies a downward shift of the investment function. The profitability effects in the
model presented here, with investment being a function of the rate of utilization and the profit
share, have been formalized by Bhaduri and Marglin (1990), the article of which is famous for
having defined the dichotomy between wage-led and profit-led regimes. Similar formalizations of
7
Both Marglin and Bhaduri (1990) and Bowles and Boyer (1995) found that this differential in propensities to save
out of profits and out of wages was around 0.40 on average over several countries. This is in line with the results of
Onaran and Galanis (2012).
8
Kalecki‘s equation, in its simplified version where wages are all consumed and profits are all saved, says that
realized profits are equal to the value of investment expenditures. If investment depends on realized profits, the
equation would imply that higher real wages that induce higher investment expenditures would always lead to higher
profits, and hence taking profitability into account would never allow us to modify our previous conclusions. This
has been called the paradox of costs by Rowthorn (1981): higher wage costs reduce profits for a single firm, but with
the accelerator they increase overall profits if all firms face similar cost increases.
17
the investment function were also adopted by Kurz (1990), Taylor (1991) and Blecker (2002), as
well as by many authors wishing to assess the presence of these regimes in empirical studies. This
variant of the canonical Kaleckian model is often referred to as the post-Kaleckian model of
growth and distribution. It is worth quoting Bhaduri and Marglin in full here:
Any increase in real wage rate, depressing profit margin and profit share ..., must
decrease savings and increase consumption to validate the under-consumptionist
thesis.... Nevertheless, aggregate demand (C + I) may still rise or fall depending on
what impact that lower profit margin/share has on investment. Since it is plausible
to argue that, other things being equal, a lower profit margin/share would weaken
the incentive to invest, the contradictory effects of any exogenous variation in the
real wage on the level of aggregate demand become apparent. A higher real wage
increases consumption but reduces investment, in so far as investment depends on
the profit margin. (Bhaduri and Marglin 1990, p. 378).
Figure 3. Effects of an increase in the wage share in the post-Kaleckian model
q
qma
I0
S0
I0
I, S
q0
Ia
qm
S1
I2
I1
Figure 3 illustrates the three possible cases that may arise when profitability is taken into
consideration. If the profitability effect is weak (relative to the consumption effect and the
accelerator effect), with the investment function not dropping below I1, then both GDP and
18
investment are higher following the increase in real wages. In this case, both the short-run and
the long-run effects are favourable to the economy. We will then say that the economy is
experiencing a wage-led demand regime as well as a wage-led investment regime, since GDP is rising in the
short-run but is also likely to grow faster in the long-run, thanks to the higher rate of investment.
In the intermediate case, the profitability effect will lead to a shift of the investment curve
somewhere between the I1 and the I2 curves. In this case, higher real GDP generates a higher
output level but investment will be lower. We will then say that the economy is still in a wage-led
demand regime, while belonging to a profit-led investment regime. This is because GDP is rising in the
short-run, but likely to grow more slowly in the long-run, due to the lower investment level.
Finally, we have the third case, which occurs when the profitability effect shifts the investment
function below the I2 curve, meaning that the increase in real wages provokes a reduction in real
output and a reduction in investment expenditures. This case corresponds to both a profit-led
demand regime and a profit-led investment regime.
All three possible cases are shown in Table 5. It should be further pointed out that in
most empirical studies, still ignoring for now the net export component of aggregate demand,
researchers simply try to estimate the size of the shifts in the saving and investment curves, at a
given real GDP level, putting aside the multiplier and accelerator effects (that is, estimating
whether at q0, the shift in the saving curve is larger or smaller than the shift in the investment
curve, i.e., whether the increase in consumption is larger than the decrease in investment).
Table 5. Effects of an increase in the wage share and demand regimes
Effect on output (or the rate of capacity
utilization)
Positive
Negative
Effect on investment
(or the rate of
accumulation)
Positive
Wage-led demand
and
wage-led investment
Negative
Wage-led demand and
profit-led investment
Profit-led demand and
profit-led investment
Broadly speaking, we may thus say that a wage-led demand regime means that an increase in
the wage share leads to an increase in aggregate demand in the short run, or that an increase in
the profit share leads to a decrease in aggregate demand in the short run. Furthermore, we say
that a wage-led investment regime, which is a stronger and more long-run concept than wage-led
19
demand, implies that an increase in the wage share will lead in addition to an increase in
investment expenditures. Over the long run it implies an increase in the rate of accumulation of
the capital stock.
9
Of course there are many factors other than income distribution that determine
aggregate demand: monetary policy, fiscal policy, various shocks such as oil price shocks, the
bursting of a stock market bubble, changes in real exchange rates, changes in the growth rate of
foreign GDP, etc. Indeed, for most year-to-year changes, income distribution will only be a
minor influence on the determination of aggregate demand, with other developments playing a
more prominent role. However, if there are long-lasting, deep changes in income distribution as
have occurred in the last quarter century, they will end up having a substantial role.
3.3 Taking net exports into account
So far, we have not taken into account government expenditures and net exports. It is difficult to
treat government expenditures as anything but exogenous to income distribution. We may thus
say that the effects of changes in income distribution as identified above are a fair representation
of the domestic effects. Knowing whether the economy is within a domestic wage-led or profit-led
regime is important in itself. Since one country‘s exports are some other country‘s imports, this
raises the possibility of a fallacy of composition: while each individual country can increase its
demand by exporting more, not all countries can do so at the same time. The world economy
overall is a closed economy. It will thus be essential to look at the domestic effect and the total
effects (i.e., including net exports) separately. To find out whether an economy is wage-led or
profit-led in total, we must also take care of the effects of changes in income distribution on net
exports, as has been underlined by Blecker (1989, 2011) as well as Bhaduri and Marglin (1990). It
is usually argued that an increase in real wages will have a negative impact on the trade balance. If
wages are pumped up, without export prices rising, this will lead to a reduction in profit margins
and may render some exports unprofitable; if prices are pushed up, some export products will
not be competitive any more. As Blecker (1989, p. 404) said, ‗this is essentially the case of a
9
The section focuses on the demand regime. One could also define an employment regime, which depends on the
demand regime and the productivity regime (to be discussed in the next subsection). In mainstream economics it is
standard to assume a downward sloping labour demand curve, i.e., it is assumed that employment is profit led.
Keynes doubted whether a wage cut would stimulate employment and thought that, at least in some circumstances it
might decrease employment (Keynes 1936, chapter 19). This latter case is akin to a wage-led employment regime.
For modern post-Keynesian discussions of employment and wages, see Lavoie (2003) and Stockhammer (2011).
20
―profit squeeze‖, in which profit margins are compressed between domestic costs on the one
side and foreign competition on the other‘.
10
Hence an economy which is in a profit-led
domestic demand regime will normally necessarily be in a profit-led total demand regime as well.
Table 6 shows this and summarizes the various possibilities when distinguishing between the
effects of an increase in the wage share on domestic aggregate demand and the effects on total
aggregate demand, also taking into account the foreign sector.
Table 6. Effects of an increase in the wage share and domestic and total demand regimes
Effect on total aggregate demand , including
net exports
Positive
Negative
Effect on domestic
aggregate demand
(investment and
consumption only)
Positive
Wage-led domestic
demand regime and
wage-led total demand
regime
Wage-led domestic
demand regime and
profit-led total
demand regime
Negative
Profit-led domestic
demand regime and
profit-led total
demand regime
The negative effects of a higher wage share are likely to be bigger in small open
economies. In Figure 2, the negative effect on net exports can be represented as a backward shift
of the saving function, from S1 back towards S0. Finding out whether an economy is in a wage-
led or profit-led demand regime, in total, one must thus consider the net effect of an increase in
the wage share on the three private components of aggregate demand consumption,
investment and net exports and hence the net effect is not clear a priori and will depend on the
relative size of the effects on the three components. This is summarized in Table 7.
10
An increase in real wages may not have a negative effect on net exports if it arises as a result of a spontaneous
change in the pricing strategy of firms, with producers and exporters deciding to reduce their profit margins.
21
Table 7. Economic structure: wage-led and profit-led demand regimes
Demand regime
Profit-led
Wage-led
Economic structure
Small differentials in propensities
to consume
Propensity to consume out of
wages is much higher than the
propensity to consume out of
profits
Investment is highly sensitive to
profitability and accelerator
parameter is low
Investment is not sensitive to
profitability and accelerator
parameter is high
Very open economy with high net
export price elasticity and high
import income elasticity
Relatively closed economy with
low net export price elasticity and
low import income elasticity
Other factors
Other sources of demand:
Government fiscal and monetary policies
Financial factors: financial asset and real estate price bubbles
Exchange rate evolution and changes in world demand
Changes in world commodity prices ….
The addition of international trade and net exports when assessing the impact of changes
in income distribution certainly adds a degree of complexity. First, the favourable domestic
impact of an increase in the wage share may get reversed once we consider the effects on net
exports. As long as the negative impact of a higher wage share on profitability is not too large,
we may be easily persuaded that there is no necessary antagonism between capitalists and
workers in a mature capitalist economy characterized by excess capacity: it is possible to increase
both real wages and employment on the one hand, and realised profits and growth on the other
hand. This comforting conclusion must be drastically revised in the light of the model of an
open economy.... The possibility of a conflict between a redistribution towards wages and
maintaining international competitiveness greatly reduces the prospects for a happy coincidence
of worker‘s and capitalists‘ interests(Blecker 1989, p. 406-7).
11
11
Blecker refers to a mature economy, but it should be pointed out that Taylor (1983) figured that less developed
countries also operate with excess capacity, and hence that the Kaleckian model also applies to emerging countries.
22
But there is a second delicate point in the case of an open economy, already referred to
earlier, that of the danger of an error of composition, especially when an economy is in a
domestic wage-led demand regime. We will discuss this danger later, but at this stage it is worth
quoting Blecker‘s views on this in full:
A situation in which competitive wage cuts (or ‗wage restraints‘) are pursued in all
countries will potentially harm the interests of workers everywhere: real wages will
be sacrificed, as long as mark-ups are flexible; but employment will not increase, as
long as the competitive gains cancel each other out. In this case, the regressive effect
of multilateral wage cuts on income distribution could well lead to a world-wide
depression of demand and employment. On the one hand, if workers in all countries
increase their money wages, and if the international competitive effects roughly
cancel out, then the world economy as a whole can potentially enjoy wage-led
growth provided that firms still feel sufficient competitive pressures to compel
them to cut their mark-ups in response to the wage increases. (Blecker 1989, p. 407).
Thus, rather than examining what happens when the wage share changes in a single
country, it may be interesting to examine what happens when change in the wage share affects all
trading partners simultaneously. It can be thought of as a change in the world wage share. Under
this scenario, while a country may be under a profit-led demand regime when looking at the total
effect of an increase in the wage share, a simultaneous increase in the wage share of all countries
may still have a positive effect on the aggregate demand of a profit-led country if its domestic
demand is wage-led. We will see that this is indeed the case when we go over the most recent
empirical results related to demand regimes.
3.4 Productivity regimes
So far we have dealt with aggregate demand. What about supply effects? The key summary
variables for the supply side from the standpoint of mainstream economics are the capital stock
(capital accumulation) and labour productivity. As the evolution of the capital stock has already
been discussed when identifying the wage-led and profit-led investment regimes in the section
above, which from the Kaleckian standpoint mainly belong to the demand side, this section will
focus on the productivity regime.
23
Productivity will be profit led if an increase in wages discourages productivity-enhancing
capital investment and, as a consequence, the growth of labour productivity slows down (as most
forms of technological progress require capital investment, this is called embodied technological
progress). Increases in wage growth may have a positive effect on productivity growth, if either
firms react by increasing productivity-enhancing investments in order to maintain
competitiveness or if workers‘ contribution to the production process improves. This may be the
case either because of enhanced workers‘ motivation or, in developing countries, if their health
and nutritional situation improves. This case is often referred to as the efficiency wage
hypothesis in the mainstream literature.
12
But we may as well call it the Webb effect, since a
positive causal relationship going from higher real wages to higher productivity was already
proposed a long time ago by Sidney Webb (1912), one of the founders of the London School of
Economics. Other explanations have also been offered to explain the observed negative
relationship between inequality and growth.
13
The main features of the two productivity regimes
are presented in Table 8.
Table 8. Economic structure: wage-led and profit-led productivity regimes
Productivity regime
Economic
structure
Profit-led
Wage restraint leads to productivity-enhancing investment
Higher real wage growth or a higher wage share leads to
slower productivity growth
Wage-led
Wage growth has strong positive effects on labour effort and
productivityenhancing investments
Higher real wage growth or a higher wage share leads to faster
productivity growth
Defined as we just did, even mainstream economists might recognize that all economies
are in a wage-led productivity regime, since mainstream economists would argue that rising real
12
A meta-analysis a regression on regressions here based at the firm and industry level and conducted by
Krassoi Peach and Stanley (2009), has shown that the best statistical studies find a strong and robust evidence of this
efficiency wage effect, thus showing that higher real wages lead to higher productivity. This positive link is even
reinforced when controlled for simultaneity.
13
Aghion et al. (1999) discuss possible positive supply-side effects of lower inequality (and thus, implicitly, of higher
wages) based on New Growth Theory, arguing in particular that income and wealth inequality makes investment
more difficult when capital markets suffer from imperfections..
24
wages induce firms to invest in more capital-intensive methods, which, under the standard
assumptions of neoclassical production functions, would lead to higher labour productivity. We
may however also take into account indirect effects, based on another branch of post-Keynesian
economics the Kaldorian branch as do Boyer (1988), Setterfield and Cornwall (2002) as well
as Naastepad and Storm (2010), to assess whether a productivity regime is wage-led or profit-led.
In this case, we must also incorporate the demand effects. Kaldorians have for a long time
argued that supply-side growth is endogenous, thus predating the mainstream theories of
endogenous growth. This is the so-called Kaldor-Verdoorn law, for which there is a substantial
amount of empirical evidence (McCombie and Thirlwall 1994, McCombie 2002) and the formal
origins of which can be traced back to Kaldor‘s (1957) technical progress function. The Kaldor-
Verdoorn law claims that there is a positive relation between the growth rates of GDP and the
growth rate of labour productivity. In other words, demand-led growth will have an impact on
the supply components of growth (Léon-Ledesma and Thirwall 2002, Dray and Thirwall 2011).
More simply, it is claimed that there is a positive causal relationship going from the growth rate
of the economy to the growth rate of labour productivity (and even the growth rate of the labour
force).
14
What does the Kaldor-Verdoorn relation imply for the assessment of the productivity
regime? Suppose there is an increase in the wage share or in growth rate of real wages. As argued
before, the partial effect on productivity growth is likely to be positive. In the case of a wage-led
demand regime the indirect Kaldor-Verdoorn effect will reinforce the direct productivity effect.
Hence in this case, the total productivity effect will always be positive and hence we will always
have a wage-led total productivity regime. Take now the case of a profit-led demand regime. An
increase in the wage share or in the growth rate of real wages will generate a decrease in the
growth rate of the economy. The Kaldor-Verdoorn effect will translate this decrease into a
decrease in the growth rate of labour productivity. However this indirect negative effect of
increasing the growth rate of real wages may be partially or entirely wiped out by the direct
positive productivity effect, assuming once more a wage-led partial productivity regime, as
empirically verified for OECD countries by Storm and Naastepad (2008, p. 535) and Hein and
Tarassow (2010, pp. 747-9). Thus, although the economy is in a profit-led demand regime, the
14
McCombie (2002, p. 106) says that the Verdoorn coefficient is in the 0.3 to 0.6 range, meaning that a one
percentage point addition to the growth rate of output will generate a 0.3 to 0.6 percentage point increase in the
growth rate of labour productivity, a number which is also consistent with the one obtained recently by Storm and
Naastepad (2008). Hein and Tarassow (2010), looking at 1960-2007 data, find a similar range for European
countries, but a lower range for the UK and the US, between 0.1 and 0.25.
25
effect on labour productivity growth of an increase in the wage share may be positive overall,
since the direct positive productivity effect of the increase in the wage share or in the growth rate
of real wages may still overwhelm the negative indirect productivity effect arising from the
decrease in economic activity generated by wage expansion in this regime. Table 9 summarizes
the possible combined results of the productivity and demand regimes when the partial
productivity regime is wage led, which is the most likely case, and the wage share or the growth
rate in real wages is increased.
Table 9. Total productivity effect of an increase in the wage share, when the partial productivity
regime is wage led
Demand Regime
Partial productivity
effect
Indirect productivity
effect (Kaldor-
Verdoorn effect)
Total productivity
effect (sum of partial
and indirect effects)
Profit led
Positive
Negative
Positive or negative
Wage led
Positive
Positive
Positive
So far we have assumed that economic activity or economic growth has an effect on
labour productivity growth. But we have not yet taken into account the possibility that
productivity growth could have a feedback effect on economic growth and economic activity.
Thus what happens on the productivity front as result of changes in income distribution could
have an additional indirect effect on the demand regime.
15
Since the various possible cases of this
interdependence between the demand and the productivity regimes are discussed extensively by
Storm and Naastepad (2012), here we simply mention the fact that the feedback effects of
productivity growth on output growth may transform an apparent profit-led demand regime into
a wage-led one (whereas the opposite is impossible). This will happen when the total
productivity effects of an increase in the wage share are positive and large, and when the positive
15
There are two ways to conceive this. In the work of Naastepad and Storm (2010), an increase in real wages leads
to a change in productivity growth, but this then has a negative impact on the differential between real wages and
productivity. Thus, in a wage-led demand regime, this will generate a negative relationship, on the aggregate demand
front, between productivity growth and output growth. In a profit-led demand regime, this relationship will be
positive. By contrast, Hein and Tarassow (2010) consider wage shares to be the exogenous element. They argue,
along Kalecki‘s lines, that an increase in productivity growth will have a positive impact on output growth as higher
productivity growth and technical progress will induce firms to speed up accumulation, and thus this positive
relationship will occur both for wage-led and profit-led demand regimes.
26
effects of productivity growth on aggregate demand overwhelm the presumably weak negative
effects of a higher wage share on aggregate demand (Hein and Tarassow 2010, pp. 737-739).
27
4. Some empirical findings relevant to the
wage-led growth project
The previous section has developed a conceptual framework. The main components of this
framework have been investigated empirically within the wage-led growth project. This section
summarizes some key empirical findings as they relate to our conceptual framework.. We refer
the reader to the project reports for further and much more detailed findings, and for a full
discussion of the methodologies that have been used and their possible limitations.
4.1 Determinants of income distribution
Since the early 1980s dramatic changes in income distribution have occurred. There has been a
substantial decline in the wage share across the world. The decline is well documented for
advanced economies (IMF 2007), but it has also taken place in developing countries, where data
is less readily available. The decline in the wage share is one aspect of broader changes in income
distribution that also include an increase in personal income inequality, in particular in the
Anglo-Saxon countries (Atkinson et al. 2011; OECD 2011). Changes in functional income
distribution are particularly interesting for our wage-led growth project as they relate to the
demand and productivity effects previously discussed. While there is a substantial literature on
the changes in personal income distribution, the issue of functional income distribution is
comparatively under-researched, in particular for developing economies. Mainstream
explanations typically highlight technological changes as the main determinant of income
distribution and do concede that globalisation has had negative effects on the wage share in
advanced economies (IMF 2007, EC 2007). Critical economists have highlighted that welfare
state retrenchment and financialization have put downward pressure on wages (Jayadev 2008,
ILO 2009, Hein and Mundt 2012)
Stockhammer (2012) offers a panel analysis of the determinants of the wage share that
takes into account changes in technology, globalisation (in production and trade),
financialglobalization and welfare state retrenchment. While he finds some evidence regarding
the effects of technological changes, overall they are not the main driver of changes in income
distribution. Globalisation has negative effects on the wage share. Interestingly, globalisation has
not benefited workers in developing economies. A higher degree of openness has negative effects
on the wage share in advanced as well as in developing economies which is in contrast to what
the Stolper-Samuelson theorem predicted. Financialisation has a strong negative impact on the
wage share, in advanced as well as in developing economies. Welfare state retrenchment has
28
negative effects on the wage share. Labour market institutions variables do have elusive effects
on the wage share. For advanced economies, where better data is available, Stockhammer (2012)
finds that the decline in the organisational strength of labour unions has a negative effect.
These results highlight that income distribution is not primarily driven by changes in
technology. Governments can indeed influence income distribution, but several policy areas that
might not appear directly related to social policy can have strong repercussions on income
distribution. In particular financial regulation and the management of international capital flows
seem to have strong effects, as does trade policy. With regard to labour and social policies, the
results suggest that strengthening collective bargaining and the right to form labour unions are
ways to modify income distribution.
4.2 Demand effects
The Bhaduri and Marglin (1990) post-Kaleckian model has recently inspired a rich empirical
literature trying to identify demand regimes by econometric means. Onaran and Galanis (2012)
provide new consistent estimates for most G20 countries. Table 10 gives an overview of the
existing empirical results for major economies where several studies are available. These studies
differ by the countries and time period covered as well as by the method employed and are thus
difficult to compare.
16
Overall, the majority of studies find that domestic demand regimes tend to
be wage-led, whereas international trade turns demand regimes in some economies to being
profit-led.
16
Hein and Vogel (2008), Stockhammer and Stehrer (2011) and Onaran and Galanis (2012) offer more extensive
discussions of the literature.
29
Table 10. Econometric results on wage-led and profit-led demand regimes for major economies
Domestic Demand
Total Demand
wage-led
Profit-led
wage-led
Profit-led
Euro area
SOE09, OG12
SOE09, OG12
Germany
BB95, NS07, HV08,
SHG11, SS11, OG12
NS07, HV08,
SHG11, OG12
BB95
France
BB95, NS07, ES07,
HV08, SS11, OG12
(SO04), NS07,
HV08, OG12
BB95, SE07
NL
NS07, SS11
HV08
NS07
HV08
Austria
SE08, HV08, SS11
SE08, HV08
UK
BB95, NS07, HV08
OG12
SS11
BB95, NS07, HV08,
OG12
Japan
BB95, OG12
NS07
OG12
BB95, NS07
USA
BB95, HV08, OSG12,
(SS11), OG12
NS07
BB95, HV08,
OSG12, OG12
(SO04), NS07,
BFT06
Note: Reference in brackets denotes statistically insignificant results.
BB95: Bowles and Boyer 1995; BFT08: Barbosa-Filho and Taylor 2006; ES07: Ederer and
Stockhammer 2007; HV08: Hein and Vogel 2008; NS07 Naastepad and Storm 2006-07; OSG12:
Onaran et al. 2012; SO04: Stockhammer and Onaran 2004; SE08: Stockhammer and Ederer
2008; SHG11: Stockhammer et al. 2011; SOE09: Stockhammer et al. 2009; SS11: Stockhammer
and Stehrer 2011; OG12: Onaran and Galanis (2012).
Table 11 summarises the findings of Onaran and Galanis (2012). It gives the effects of a
reduction in the (adjusted) wage share for most G20 countries. More precisely, it details the
effects of a one percentage point increase in the profit share of an individual country on the
components of demand of that country (columns A, B and C), on private excess demand (the
sum of those three components, column D) and on aggregate demand (taking multiplier effects
into account, column E). Comparing the estimates of columns A and B, it can be verified that
their sum is negative and hence that all countries of the sample are in a wage-led domestic
demand regime, thus retrieving the fairly consensual result of previous studies. The impact of the
increase in the profit share on private excess demand (column D) is negative in a majority of
countries, thus meaning that these countries are in a wage-led total demand regime, but there are
still a number of countries that have a profit-led total demand.
However, as countries trade with each other, the effects of changes in income
distribution in individual countries are not the same as the effects that would arise as a result of a
worldwide change in income distribution. Thus the table also reports the results of simulating
the complex interactions of the international demand components. Column G gives the results
for a simultaneous (worldwide) decrease in the wage share in all G20 countries by one
percentage point. This effect is negative in the vast majority of the countries. Several countries
that were in a profit-led demand regime, when assessed individually, such as Canada and Mexico,
30
nonetheless do suffer reductions in demand if their trade partners also experience a decline in
the wage share. Indeed, total G20 GDP declines by 0.36% in reaction to a worldwide one
percentage point decline in the wage share, thus helping to explain why even countries that are in
a profit-led total demand regime might suffer nevertheless from a worldwide reduction in the
wage share.
Table 11. Summary of the results of Onaran and Galanis (2012): effects of a national and
global one percentage point increase in the profit share
Effects of national increase in profit share on
Effect of
worldwide
increase in
profit share
on aggregate
demand
C/Y
I/Y
NX/Y
private excess
demand/Y
aggregate
demand
A
B
C
D (A+B+C)
E
G
Euro area-12
-0.439
0.299
0.057
-0.084
-0.133
-0.245
Germany
-0.501
0.376
0.096
-0.029
-0.031
-
France
-0.305
0.088
0.198
-0.020
-0.027
-
Italy
-0.356
0.130
0.126
-0.100
-0.173
-
United Kingdom
-0.303
0.120
0.158
-0.025
-0.030
-0.214
United States
-0.426
0.000
0.037
-0.388
-0.808
-0.921
Japan
-0.353
0.284
0.055
-0.014
-0.034
-0.179
Canada
-0.326
0.182
0.266
0.122
0.148
-0.269
Australia
-0.256
0.174
0.272
0.190
0.268
0.172
Turkey
-0.491
0.000
0.283
-0.208
-0.459
-0.717
Mexico
-0.438
0.153
0.381
0.096
0.106
-0.111
Korea
-0.422
0.000
0.359
-0.063
-0.115
-0.864
Argentina
-0.153
0.015
0.192
0.054
0.075
-0.103
China
-0.412
0.000
1.986
1.574
1.932
1.115
India
-0.291
0.000
0.310
0.018
0.040
-0.027
South Africa
-0.145
0.129
0.506
0.490
0.729
0.390
Source: Onaran and Galanis (2012, Tables 11 and 13).
‗Effect of worldwide change in profit share on aggregate demand‘: effect of a simultaneous
change in the profit share in all countries, including domestic multiplier effects and
international trade effects
Note: The global simulation excludes Germany, France and Italy since they are part of the
Eurozone.
These results have important policy implications. They indicate that, at least with regard
to aggregate demand, an internationally coordinated wage-led growth strategy seems viable.
Aggregate demand in the world economy is clearly wage led. While there are some countries that
are individually profit led, the positive effect of the profit share on demand relies on net exports.
Effectively this means that some individual countries can successfully pursue beggar-thy-
31
neighbour policies via wage moderation, but this does not constitute a viable strategy for demand
on a global scale. If all countries pursue wage moderation policies, a much smaller subset of the
countries in a profit-led total demand regime will still benefit from their pro-capital distributional
policies. This highlights the need for policy makers to realise the role of wages as a source of
demand. On a more technical level, it highlights the need for international coordination when
dealing with wage and social policies, so as to prevent a race to the bottom in wages.
4.3 Productivity effects
On the supply side, the key question is how changes in the wage share or in real wages affect
productivity growth (or more broadly speaking, technological progress). Mainstream economists
typically argue that competitive markets are most conducive to growth and, in the next step,
argue for labour market (and product market) deregulation. Critical economists highlight that
labour market institutions can not only have positive social effects as they help overcome market
failures, but they also may have positive effects on economic growth because good labour
relations will improve the propensity of workers to contribute to the production process.
Recently, this has inspired several empirical studies, which are surveyed by Storm and
Naastepad (2012). Naastepad (2006) found that a 1% percentage point increase in real wages
would lead to a 0.52% point increase in labour productivity for the Netherlands. Storm and
Naastepad (2009) investigate labour market institutions in twenty OECD countries from 1984 to
2004. They find that relatively regulated and coordinated (‗rigid‘) institutions lead to higher
productivity growth. Vergeer and Kleinknecht (2010-11) perform a panel analysis for OECD
countries from 1960 to 2004 and also find that stronger labour market institutions lead to faster
long-run growth. Both studies also look at the impact of real wage growth on productivity
growth. Both Storm and Naastepad (2009) and Vergeer and Kleinknecht (2010-11) find that
faster real wage growth leads to faster productivity growth, the former with an elasticity ranging
from 0.50 to 0.55 while the latter gets numbers ranging from 0.31 to 0.39 for a longer time
period. Hein and Tarassow (2010) analyse the link between income distribution and productivity
growth for six OECD economies by means of time series analysis over the 1960-2007 period.
They also report that faster real wage growth leads to faster productivity growth, the elasticity
running around 0.30 except for Austria where it reaches 0.67.
All these studies face challenges in identifying the direction of causality and the
distinction between short-run and long-run effects, and more research is certainly needed.
Indeed, simple national growth accounting makes clear that faster productivity growth should be
32
associated with faster real wage growth, thus bringing about the problem of reverse causality.
Marquetti (2004) has found however that while real wages appear to Granger-cause productivity,
the reverse is not true there is unidirectional causality. This would thus justify studies that
pertain to study the impact of real wage growth on productivity growth.
Storm and Naastepad (2012) summarise these findings by positing that, as a reasonable
order of magnitude (for advanced economies) one can assume that a one percentage point
increase in real wage growth leads to a 0.38 percentage point increase in labour productivity
growth. This illustrates that higher real wages induce firms to increase labour productivity in
order to protect their profitability. Hence, despite the small number of studies, it seems fair to
conclude that the available evidence suggests that real wage growth has a positive long-run effect
on labour productivity growth. This is important for economic policy as it suggests that
excessive wage constraint is likely to lead to weak productivity performance, while a wage-led
growth strategy is consistent with positive developments on the supply side.
4.4 Classifying recent growth regimes and strategies
Neoliberalism came with the promise that deregulation of goods markets, labour markets and
financial markets would lead to higher growth and increased welfare. Higher inequality was to be
accepted because it was said to yield economic benefits. In our terminology, neoliberalism
posited a strongly profit-led economic regime. But neoliberalism has failed to deliver on its
promise. Growth rates in the allegedly overregulated postwar era were higher than in the
neoliberal phase. Deregulation and globalization did indeed generate increased inequality, but
without much of the benefits that were supposed to come with them.
If the world economy is indeed wage led (as we have argued above), how did neoliberal
economies grow at all? In our view, neoliberalism has operated in the south-west cell of Tables 3
and 4, pursuing a strategy based on pro-capital distributional policies, but within an essentially
wage-led economic structure. Such a strategy will lead either to stagnation or it has to rely on
external factors for stimulating growth. Indeed the latter is what has characterized the
performance of neoliberalism in practice. Instead of generating a robust growth path based on
rising profit margins and profit shares, neoliberalism in practice has relied on either financial
bubbles and rising indebtedness (in short, finance-led or debt-led growth) or it has relied on a
mercantilist strategy based on export surpluses. Boom-bust cycles driven by stock markets,
property markets or capital flows have been a key feature of neoliberalism as practiced in the real
world, as exemplified by the Latin American crises of the 1980s and of the mid 1990s (the Peso
33
crisis), the EMS (European Monetary System) crisis (1992/93), the South East Asia crisis
(1997/98), the dot.com bubble burst 2000/01 and the Great Recession of 2008/09.
To understand this pattern one has to appreciate the central role of financial deregulation
and the rising importance of finance for the neoliberal growth model a process that is now
called financialization (Hein and Mundt 2012, van Treeck and Sturn 2012). Besides contributing to
the rise in income inequality, as managers and employees of the finance sector rip off bonuses of
all sorts, financial deregulation has given rise to speculative episodes and, over long periods, to
increasing debt levels for financial institutions and households, making up for the impact of
reduced wage growth on consumption expenditures (Barba and Pivetti 2009). Booms on stock
markets and property markets are allowed by bubbles in the supply of credit, and they often
attract capital inflows that fuel the bubbles further (Reinhart and Reinhart 2008; Kindleberger
and Aliber 2011). But the liberalization of capital flows also means that some countries will have
current account surpluses and net capital outflows. International financial deregulation thereby
has given rise to two symbiotic growth models: a debt-led growth model (with foreign capital
inflows) and an export-led model (with capital outflows).
While the dichotomy of debt-led and export-led growth models is useful as it captures an
important part of the dynamics behind the growing international imbalances, Hein and Mundt
(2012) develop a more nuanced taxonomy that allows to empirically classify growth models as
debt-led, domestic demand-led, weakly export-led and strongly export-led. Table 12 summarises
their main results.
Table 12. Taxonomy of G20 countries and of growth models of neoliberalism in practice
Debt-led
Domestic demand-led
Weakly export-led
Strongly export-led
Australia
Mexico
United Kingdom
USA
France
Italy
India
South Africa
Turkey
Argentina
Brazil
Canada
Russia
Saudi Arabia
China
Germany
Indonesia
Japan
South Korea
Source: Hein and Mundt (2012, Table 7).
Two statistics will help substantiate the usefulness of the distinction in debt-led and
export-led economies.
17
We wish to demonstrate, that roughly speaking and with some
17
Similar statistics, but from different sources or time periods, are also provided by Hein and Mundt (2012).
34
exceptions, countries that have run current account deficits over the last decade are the same
countries that have greatly speeded up their accumulation of household debt relative to GDP.
18
Table 13 splits a set of countries into two groups, according to their average current account
balance as a ratio of GDP between 2003 and 2010, by distinguishing between countries that have
run large current account surpluses and those with large current account deficits, omitting the
countries that had roughly neutral current account balances.
Table 13. International imbalances and changes in household debt, selected countries
Countries
Current account
balance (a)
Increase in household
debt (b)
Countries with large
current account
surpluses
Switzerland
+11.8
+5
Russia
+7.5
+9
Netherlands
+6.7
+33
China
+6.3
+8
Germany
+5.4
-11
Japan
+3.6
-7
Austria
+2.9
+8
South Korea
+2.5
+32
Countries with large
current account
deficits
Greece
-10.2
+35
Portugal
-9.9
+27
Spain
-6.8
+34
USA
-4.7
+26
Ireland
-2.6
+63
United Kingdom
-2.3
+32
Italy
-2.1
+18
Australia
-2.0
+42
(a) Current account balances are in percentage of GDP, 2003-2010 averages.
(b) Increases in household debt are in percentage points of GDP, between 2000 and 2008.
Ireland starts at 2001; Switzerland starts at 1999 and ends in 2007.
Source: Current account balances: IMF (2011); Household debt: McKinsey (2010, Appendix A),
and for Ireland, Greece, Austria and the Netherlands the data comes from Eurostat (financial
flows and stocks by sector).
18
In a sense, this is not unexpected, since by identity, as pointed out in particular by the late Wynne Godley,
domestic household net borrowing + corporate net borrowing + public borrowing = current account deficit.
35
European countries such as Germany, Switzerland and the Netherlands have experienced
large current account surpluses, as have Russia, Japan and China.
19
By contrast, the USA, the UK
and peripheral European countries such as Greece, Portugal, and Spain have been subjected to
large current account deficits.
20
The last column of Table 13 shows the increase in household
debt, in percentage points, from 2000 to 2008. For instance, in the case of the USA, the
household debt to GDP ratio moved from 72% to 97% between 2000 and 2008 an increase of
25 percentage points from the beginning of the millennium until the beginning of the global
financial crisis. Countries that had substantial current account deficits also went through very
large increases in their household debt to GDP ratio over the most recent decade, as exemplified
by Greece and Spain among others. By contrast, many of the countries that enjoyed large current
account surpluses had either a decrease in their household debt to GDP ratio or a small increase
in this ratio, with the exception of the Netherlands and South Korea.
These findings are important for economic policy making because they illustrate how
neoliberalism in practice has generated growth, despite a wage-led economic regime: it has relied
on external stimulation of demand, either via debt-led growth or via export-led growth. Both
growth mechanisms can work for some countries for some time, but both are ultimately
unsustainable. Debt-led growth comes with rising debt levels of households and of the financial
sector. The crisis and its subsequent painful deleveraging process illustrate the limits of this
growth model. Export-led growth models require high (or rising) current account surpluses in
some countries and thus deficits in others. In other words, they require rising international
imbalances, which are widely considered to have contributed to the financial crisis. In short,
neoliberalism in practice has given rise to unstable and unsustainable growth. After its collapse,
the world economy needs an alternative.
19
Some authors have questioned the claim that Asian economies and China in particular have pursued export-led
growth. They argue that, based on a growth accounting approach, the domestic components of aggregate demand
have grown faster than net exports (Felipe and Lim 2005). Still, these countries have run consistently large current
account surpluses.
20
With the exception of Ireland, current account positions and trade balances are similar. Ireland, in past decades,
has had current account deficits, but net export surpluses. This is because of the large amount of repatriated profits,
thus leading to a large discrepancy between GDP and GNP.
36
5. Conclusion: Wage-led growth a viable economic strategy
Wages have a dual function in capitalist economies. They are a cost of production as well as a
source of demand. An increase in the wage share has several effects on demand and whether
actual demand regimes are wage led or profit led is subject to an ongoing academic debate. Our
interpretation of the available evidence is that domestic demand regimes are likely to be wage led
in most economies. In open economies the net export effects may overpower the domestic
effects and total demand in many individual countries may well be profit led. However larger
geographical (or economic) areas are likely to be wage led. The most recent empirical studies
show that the world economy overall is in a wage-led demand regime and if all countries pursue
pro-labour distributional policies simultaneously, even countries that are profit-led will
experience increases in aggregate demand, their economic activity being driven up by faster
growth abroad. This can be contrasted to a situation where all countries are pursuing an export-
led strategy: it is clear that only half of them can be successful, as all countries cannot be
simultaneously net exporters.
There is comparatively less research on the supply-side effects of an increase in the wage
share. However, there are several studies that find positive effects of wage increases on
productivity growth, suggesting that the long-term effects of wage expansion are likely to be
favourable to the economy.
There is an alternative to neoliberalism. Indeed there needs to be an alternative to
neoliberal policies, because the export-growth model is of limited use and generates global
imbalances, while the model based on debt-led consumption is unsustainable. A wage-led growth
strategy is a viable option and the most likely strategy to succeed if coordinated internationally.
21
A wage-led growth strategy would combine pro-labour distributional social and labour market
policies, along with a proper regulation of the financial sector, including a reduction in the
income claims of top management, most surely those in financial sectors, as well as a reduction
in the claims of those collecting interest and dividend payments.
21
It is sometimes argued by Marxist authors that wage-led demand regimes are unstable, meaning that high output
and employment growth rates achieved with high wage shares will generate further increases in the wage share
because of the stronger bargaining power of workers. Thus the feedback effects of aggregate demand and
employment on income distribution, effects that we have not considered in this paper since we assumed the wage
share to be an exogenous element, can make the wage-led demand regime unstable in that growing wage shares and
higher growth may create reinforcing cycle (Stockhammer 2004). This argument however omits the feedback effects
driven by the productivity regime. Fast output growth may not entail fast employment growth, because of the rise in
productivity growth generated by the Kaldor-Verdoorn effect, as explained in detail in Storm and Naastepad (2012).
37
Distributional policies that are likely to increase the wage share and reduce wage
dispersion include increasing or establishing minimum wages, strengthening social security
systems, improving union legislation and increasing the reach of collective bargaining
agreements.
22
All of these policies go against orthodox economic wisdom and, under the
perceived pressure to reduce public budget deficits, current economic policy seems to be moving
in the opposite direction, with calls for government austerity policies, which are most likely to
affect the middle class and the poor, and calls for structural reforms, which are a euphemism for
more flexible labour markets and reduced wage rates. However, in times of crisis and a lack of
effective demand, what economies need is more state involvement, not less. A successful policy
package to economic recovery needs to have sustained wage growth as one of its core building
blocks. Only when wages grow with productivity growth will consumption expenditures grow
without rising debt levels.
To be successful a modern version of a wage-led growth strategy will also require a
restructuring of the financial sector. The deregulated financial sector has fuelled speculative
growth and resulted in the worst recession since the 1930s. If a repeat of the crisis is to be
prevented, this will require managing international capital flows, a re-focussing of the financial
sector on narrow banking, the elimination of destabilizing financial innovations, and a higher
fiscal contribution of the financial sector (e.g., in the form of a financial transactions tax). Briefly
put, as suggested by Hein and Mundt (2012), what is needed is a ‗Global Keynesian New Deal‘.
Some concerns have been expressed regarding the potential negative effects that such
pro-labour policies would exercise on countries that are currently in a profit-led demand regime.
Countries like China are likely to have parameters that put them in a profit-led demand regime,
due to their large trade sector, highly dependent on pricing conditions, and their low propensity
to consume out of wages. How can an economy operating under the conditions of a profit-led
regime be transformed into one where a wage-led regime rules? Only a couple of hints will be
provided. On the export front, one would need to modify the range of products being offered
for exports, progressively switching to products that are less sensitive to pricing competition. On
the domestic front, it is clear that a well-developed social security system with proper
unemployment programs, support programs for the elderly, and full health coverage are likely
to induce income recipients, and in particular wage earners, to reduce their precautionary savings,
22
Meta-analysis has shown that raising minimum wages do not lead to reduced employment, in contrast to what is
asserted by mainstream authors on the basis of a partial equilibrium analysis. Doucouliagos and Stanley (2009)
demonstrate that the minimum wage literature is contaminated by publication bias, and that the best studies support
the claim that there is no negative relationship between minimum wages and employment.
38
thus leading to a reduction in the propensity to consume out of wages, and hence helping to
create the structural conditions required for a wage-led regime.
39
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... In summary, the recovery from such a crisis period, whose economic effects are similar to that of the 2008 crisis, calls for targeted and effective intervention in terms of attractiveness, securing national and international private investment, and promoting employment and wage. These interventions make sense because of their relative importance to the different components of aggregate demand (Lavoie & Stockhammer, 2013;Palley, 2017). ...
... Based on the above developments on recent issues (International Monetary Fond, 2021a, 2021b and previous works (Bhaduri & Marglin, 1990;Lavoie & Stockhammer, 2013;Oyvat et al., 2018), the main question in this paper is what main macroeconomic channels for relaunching growth dynamics in Africa in this period of a health crisis are? Specifically, the study seeks to answer two under-addressed questions in the literature. ...
... These include strengthening unions, improving unemployment benefits, and promoting financial regulation. The authors show that the wage share is not an instrument but an aggregation of all these interventions (Lavoie & Stockhammer, 2013). ...
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The Sar-Cov-2 pandemic that began in 2019 has significantly affected the global economy and, in particular, those of African countries. This paper analyzes possible intervention channels by African states to put their economies back on a sustainable growth path once the health crisis is under control. The paper proposes workable macroeconomic channels for these countries’ recovery from post-pandemic periods by using historical data to conduct empirical analyses. The paper employs World Bank data and ILOSTAT for 54 African countries within the period 1990–2018. We use a post-Keynesian framework and the difference and system generalized method-of-moments to show that wages drive African economic dynamics in the short run. This is particularly true for Sub-Saharan African countries. In addition, foreign output, proxied by European Union output, has a positive and significant impact on Sub-Saharan African economies in the short and long run. The results highlight strategic policy measures for recovering African economies, including improving wages and deepening international economic relations, particularly with the Eurozone countries.
... Wage income plays a dual role in the economy: on one side, it is a cost for the production firm sector; on the other side, it is the source of income for households, which contributes to the demand for the production sector's goods and services. This dual role of wages has been reflected in most post-Keynesian analyses (Brown, 1997(Brown, , 2007Duesenberry, 1949;Lavoie & Stockhammer, 2012). As a result, the overall effect of the decrease of the wage share on aggregate demand must be explained by the differentil responsiveness of consumption, investment and net exports to changes in income distribution. ...
... The income shifts from labour to capital where a large number of countries in the past decades have witnessed falling wage shares and polarisation of the personal income distribution. This has demonstrated the limitations and even falsehood of the claim that wage moderation, accompanied by more flexible labour markets as well as labour institutions and laws more favourable to employers, will ultimately make for a more stable economy and a more productive and dynamic economic system, e.g., Lavoie and Stockhammer (2012), Nikolaidi (2015) and Bhaduri (2011). ...
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The study aims to lay down a parsimonious and tractable stock-flow-consistent macroeconomic modelling approach to enhance the analysis of identification and investigation of the key underlying causes of the macroeconomic and financial instability in the context of the 2007–2008 Global Financial Crises (GFC) and COVID-19 pandemic. The model has the following key features. First, the assets and liabilities of the four major sectors, households, firms, commercial banks and government, are explicitly formalised by considering the accounting flow of the fund approach. Second, the behaviour of each sector has been derived and analysed based on accounting identities derived from the transaction flow matrix. Third, the model is calibrated and simulated by determining the values of the parameters and the exogenous variables based on the US macroeconomic data. Fourth, the most relevant simulation experiments and their results have been sufficiently analysed to produce forecasts and provide specific policy recommendations. The findings suggest that a decline in the wage share in the national income was seen to have undermined financial and macroeconomic stability in the US (and elsewhere). The results concur with the experience of current economic crises that are associated with the impact of COVID-19.
... Since the early 1980s, labour share has declined significantly within the large majority of countries (Lavoie and Stockhammer 2013;Karabarbounis and Neiman 2014;Autor et al. 2017). Between 1995 and 2014, the labour share in OECD countries decreased in 20 countries and increased in 11 countries (Schwellnus et al. 2017). ...
... Grossman et al. (2017) find that a one-percentage-point slowdown in per capita income growth may explain between half and all the observed decline in labour share in the US. Lavoie and Stockhammer (2013) state that the main reason for a decline in labour share is a change in economic policy as well as the institutional and legal environment. Labour costs, and thus labour share, fluctuate during the business cycle and are highest during a recession (Mohun 2006). ...
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The article examines the issue of labour share convergence between Western Europe (EU15) and Central and Eastern Europe (EU11). The results of our research show that for the period of 2009–2018, the convergence of labour share between the EU11 and the EU15 at the aggregate level was almost 40%. At the sectoral level, convergence of labour share between the EU11 and the EU15 occurred in three of the four main sectors—manufacturing, services, and construction—while there was a divergence in the trade sector. At the sectoral level, the highest level of convergence occurred in manufacturing—over 89.7%. In the service sector, the convergence of labour share was almost 45%, but this was mainly due to the fact that in the information and communication industry, the convergence was almost 87.8%. We have determined that for a number of sectors and industries there is an inverse relationship between the level of labour share and its dynamics, which influences the convergence of labour share between the EU11 and the EU15. We also determined that during the period under review, the level of convergence of labour share between the EU11 and the EU15 was five times higher than the level of convergence of the economy and ascertained the main reasons for the labour share convergence being higher than the economy convergence.
... A country having a wage-led or profit-led demand regime is not the same as actual growth being caused by an increase in the wage share or profit share. Actual growth is determined by the combination of the structural features of an economy, which shape the demand regime, and the policies enacted in the country, which could be pro-labor or pro-capital (Lavoie and Stockhammer 2013). If there is congruence between the demand regime and the policy regime (for example if pro-labor policies are implemented in a wage-led demand regime), growth will ensue; if there is a mismatch (for example if procapital policies are implemented in a wage-led demand regime), there will be stagnation. ...
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We present a new methodology for operationalizing growth models based on import-adjusted demand components. Applying the methodology to the latest release of OECD Input-Output Tables, we calculate the growth contributions of consumption, investment, government expenditures, and exports for sixty-six countries in the periods 1995 to 2007 and 2009 to 2018 and identify the respective growth models. We find that most countries are export-led or domestic demand-led and that other forms of growth are rare. Our results corroborate previous classifications in comparative political economy but also differ from them in significant respects. Importantly, our classification improves on previous ones by covering not just the advanced capitalist economies but also Central and Eastern European and South-East Asian and Latin American countries. In a further step, we illustrate how the new indicators can be used to analyze the “drivers” of different types of growth. This examination reveals that there is a clear trade-off between consumption- and export-led growth in advanced Western economies in the period 1995 to 2007 and a dependence of export-led growth in these countries on real exchange rate devaluation in the same period, while export complexity is not a significant predictor of export-led growth.
... propensities to consume, sensitivity of investment to demand and profit share, real exchange rate and demand sensitivity of imports and exports). Actual growth in turn depends on whether public policy is consistent or inconsistent with the underlying growth model (Lavoie and Stockhammer 2012). By Crucially, our approach to growth models hinges on the claim that the ability to combine different demand drivers of growth differs across countries. ...
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This article develops a framework for studying the politics of growth models. These, the authors posit, are sustained by ‘growth coalitions’ based in key sectors. Their members are first and foremost firms and employer associations, but fractions of labor are also included, if their interests do not impair the model’s functionality. There is no guarantee that a growth coalition and a winning electoral coalition coincide. In normal times, a growth coalition effectively insulates itself from political competition, and mainstream political parties converge on key growth model policies. In moments of crisis, however, the coalition shrinks, favoring the emergence of challengers that fundamentally contest the status quo. The way governing parties respond to electoral pressures can also play an important role in the recalibration of growth models. The authors illustrate the argument by examining the politics of ‘export-led growth’ in Germany, ‘construction-led growth’ in Spain, and ‘balanced growth’ in Sweden.
... A rich empirical literature estimates reduce-form equations inspired on the Neo-Kaleckian model to determine whether different countries are wage-led or profit-led. An overview of the literature with abundant references can be found in Lavoie and Stockhammer (2013), Stockhammer (2017) and Blecker (2016). 5 Here we are using the terminology of Hein, instead of the original terminology proposed by Bhaduri and Marglin (1990). ...
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The Neo‐Kaleckian model predicts that actual capacity utilisation is endogenous to demand shocks and positively correlated with growth in the short and long run. Competing macroeconomic theories predict that such correlation does not exist in the long run and demand shocks have transitory effects on capacity utilisation. Using a quarterly unbalanced panel of 21 developed and developing countries, we show that taking into account direct survey measures, capacity utilisation is stationary, positively correlated with growth in the short run and uncorrelated with growth in the long run. These results are inconsistent with the long‐run behaviour of the Neo‐Kaleckian model.
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This paper examines the impact of exports and R&D on the industrial growth in Jordan for the sample period 2009-2017, using micro-level panel data (2-Digit SIC). It uses the generalized Cobb-Douglass Production function. Industrial growth is assumed to be a function of industrial exports, spending on R and D, consumption from intermediate goods, consumption from intermediate services, and employees' compensations. Two seemingly unrelated Regression models have been estimated. The first model is based on dividing industries according to the ratio of export-to-production (Greater than 20, 10-20%, and less than 10%), while the second model is based on the ratio of spending on R&D to revenue (Greater than 1.25%, 0.5-1.25%, less than 0.5. The results reveal evidence supporting the export-led growth in the industries which export 10 percent or more of their production. On the other hand, R & D provided no significant impact on industrial growth in all equations, except in the industries where the percent of R & D varies between 0.5-1.25%, reflecting that most industries invest little in research and R&D.
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This chapter investigates the role of household debt in economic growth from four Post Keynesians perspectives. We find that household debt can cause a financial crisis via five channels. It influences the consumption levels of households, the leverage of financial institutions, rate of return on mortgage and other debt held by banks and other financial institutions, the rate of return on production of goods and services, and the overall well-being of households in our economy. Amelioration of household debt’s systemic risk is discussed from two sides. From the income side, creating a work environment favorable to unions and a job guarantee program provides greater stability. From the expenditure side, providing medicare, childcare, eldercare, higher education, and potentially housing, would remove the reasons why households acquire potentially unsustainable debt.
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In recent years, diverging demand and growth regimes received greater scholarly attention. Particularly, the intersection between variants of Comparative Political Economy and the post-Keynesian macroeconomic analysis provides a promising avenue for understanding the main dynamics of various growth regimes. Yet, the majority of these studies focused on the global North. We expand this analysis to the global South by examining eight large emerging capitalist economies (ECEs), Argentina, Brazil, China, India, Mexico, Russia, South Africa, and Turkey, during the periods 2000–2008 and 2009–2019. In so doing, we not only uncover the main demand and growth regimes of ECEs for the two periods but also link them to the main trends in the demand and growth regimes of developed capitalist economies (DCEs) for both periods. One main finding of our research is that ECEs did not follow the same path as DCEs after the Great Recession. While there was a clear shift in the demand and growth regimes of DCEs toward export orientation, the main pattern in the ECEs remained as the continuation of a trend that already emerged before the 2007–09 crisis, i.e., domestic demand-led regimes associated with considerable financial deficits of domestic private and/or public sectors. Finally, we provide some observations on the puzzle of resilient domestic demand-led regimes in ECEs.
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An extensive literature in comparative political economy has examined the determinants of wage militancy and moderation at the country level. So far, however, there has been no attempt to analyse the determinants of wage satisfaction and dissatisfaction at the individual level. Based on two waves of the International Social Survey Programme, this article seeks to fill this void. It examines to what extent trade exposure affects individual attitudes towards wages, and whether bargaining institutions facilitate the internalisation of competitiveness requirements, as suggested by the vast literature on neocorporatism. Surprisingly, no relationship is found between the structure of wage bargaining (more or less coordinated or centralised) and wage dissatisfaction at the individual level. Instead, wage dissatisfaction decreases strongly when workers are individually exposed to trade and countries rely heavily on export-led growth. The findings point to the need to rethink the determinants of wage moderation. Supplemental data for this article can be accessed online at: https://doi.org/10.1080/01402382.2021.2024010 .
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Mainstream economists argue that unemployment can be reduced by deregulation of labor markets, that is, by easier firing, reduction of minimum wages and social benefits, and so forth. Our panel data analysis shows that wage-cost saving flexibilization of labor markets has a negative impact on labor productivity growth. A one percentage point change in growth rates of real wages leads to a change in labor productivity growth by 0.31-0.39 percentage points. This cannot solely be explained by hiring low-productive labor. Flexibilization of labor markets leads to a labor-intensive growth path that is problematic with an aging population in Europe.
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Neoliberalism--the doctrine that market exchange is an ethic in itself, capable of acting as a guide for all human action--has become dominant in both thought and practice throughout much of the world since 1970 or so. Writing for a wide audience, David Harvey, author of The New Imperialism and The Condition of Postmodernity, here tells the political-economic story of where neoliberalization came from and how it proliferated on the world stage. Through critical engagement with this history, he constructs a framework, not only for analyzing the political and economic dangers that now surround us, but also for assessing the prospects for the more socially just alternatives being advocated by many oppositional movements.
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This book was originally published by Macmillan in 1936. It was voted the top Academic Book that Shaped Modern Britain by Academic Book Week (UK) in 2017, and in 2011 was placed on Time Magazine's top 100 non-fiction books written in English since 1923. Reissued with a fresh Introduction by the Nobel-prize winner Paul Krugman and a new Afterword by Keynes’ biographer Robert Skidelsky, this important work is made available to a new generation. The General Theory of Employment, Interest and Money transformed economics and changed the face of modern macroeconomics. Keynes’ argument is based on the idea that the level of employment is not determined by the price of labour, but by the spending of money. It gave way to an entirely new approach where employment, inflation and the market economy are concerned. Highly provocative at its time of publication, this book and Keynes’ theories continue to remain the subject of much support and praise, criticism and debate. Economists at any stage in their career will enjoy revisiting this treatise and observing the relevance of Keynes’ work in today’s contemporary climate.
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One of Bert Brecht’s Geschichten vom Herrn K. goes like this. A man who had not seen Herrn K. for a long time greeted him with: ‘You haven’t changed at all!’ ‘O’ said Herr K. and grew pale.
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In 2008/09 the world economy was hit by a decline in real GDP, the scale of which had not been seen for generations. The so-called ‘Great Recession’ started with the collapse of the sub prime mortgage market in the United States in summer 2007, and it gained momentum following the collapse of Lehman Brothers in September 2008. Under the conditions of deregulated and liberalized international financial markets, the financial and real crisis spread rapidly across the world, reaching another climax with the euro crisis which began in 2010. Although recovery has already started in late 2009 — albeit with different speeds in different countries — the world economy is far from having overcome the causes of the crisis which are rooted in long-run developments since the early 1980s. We hold that the severity of the present crisis is due to the following medium- to long-run developments, in particular in the advanced capitalist economies but also affecting the emerging market economies: the inefficient regulation of financial markets; an increasing inequality in the distribution of income; and rising imbalances at the global (and at the euro area) level.1 These developments have been dominated by the policies aimed at the deregulation of labour markets, the reduction of the level of government intervention in the market economy and of government demand management, the redistribution of income from (lower) wages to profits and top management salaries, and the deregulation and liberalization of national and international financial markets.
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In the last quarter century dramatic changes in income distribution have taken place. This refers to the personal distribution of income as well as to the functional distribution of income. Distribution has become more polarized in most OECD countries (OECD 2008, 2011), with the very top income groups increasing their income shares substantially in the Anglo-Saxon countries, in particular in the United States (Atkinson et al. 2011). Wage shares have fallen in virtually all OECD countries, with decreases typically being more pronounced in continental European countries (and Japan) than in the Anglo-Saxon countries. In the advanced economies1 the (adjusted) wage share has, on average, fallen from 73.4 in 1980 to 64.0 per cent in 2007 (Figure 2.1). The data for Germany are very similar (72.2 to 61.8); the decline is somewhat stronger in Japan (77.2 to 62.2) and a little weaker in the United States (70.0 to 64.9). Overall, real wage growth has clearly lagged behind productivity growth since around 1980. This constitutes a major historical change as wage shares had been stable or increasing in the post-war era.
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According to standard writing class instructions, a surefire way of having one’s manuscripts ignored is to start off with a lengthy prologue. We deliberately offend this golden rule and take a detour, treating our readers to a perhaps unusual account of a well-known piece of recent economic history — the ‘Dutch employment miracle’ of the 1980s and 1990s (Blanchard 2000; The Economist 2002). What was so miraculous to many was the sharp and sustained drop in the supposedly sclerotic Dutch unemployment rate, which had peaked at more than 11 per cent of the labour force in 1982 — a rate which was 2.1 percentage points higher than the average EU-15 unemployment rate in the same year. By 1990, Dutch unemployment had come down to 5.1 per cent, a full 2.1 percentage points below the EU-15 unemployment rate in the same year, and it declined further to only 3.1 per cent in 2000, with the EU-15 unemployment rate stuck at 7.7 per cent; the Dutch managed to maintain the momentum, keeping unemployment down at 3.8 per cent of the labour force during the period 2000–10, a full 4 percentage points lower than the unemployment rate in the EU-15. This labour market success is generally ascribed to the Dutch socioeconomic model, colloquially known as the ‘Polder Model’.
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It is somewhat ironical that without Kaldor’s celebrated inaugural lecture of 1966 the widespread use of the term ‘Verdoorn’s Law’ (Verdoorn, 1949) to describe the relationship between productivity and output growth may never have come to pass. Moreover, Verdoorn himself made no further major contribution after his seminal 1949 paper to the extensive literature that has developed concerning the law. Indeed, the main impetus for the subsequent revival of interest in the law ironically may be traced back to Rowthorn’s (1975a) critique of Kaldor’s specification of the law. Verdoorn’s (1980) only other notable article was to reinterpret the law within a neoclassical framework and simultaneously to distance himself from it.2,3