No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
The effects of income distribution and fiscal policy on aggregate demand, investment and the budget balance: the case of Europe1
Abstract
This paper develops a multi-country post-Kaleckian model that incorporates the role of the government. One key novelty of the model is that it integrates cross-country effects of changes in both income distribution and fiscal policy. The model is used to estimate econometrically the effects of income distribution and fiscal policy on the components of aggregate demand and the budget balance in EU15 countries. The results show that a simultaneous increase in the wage share in all EU15 countries would increase demand and the primary budget balance in all countries. A simultaneous increase in government spending turns out to boost economic activity in all the EU15 countries, indicating the positive economic effects of expansionary fiscal policy. Moreover, a progressive tax policy that would be implemented simultaneously at the EU level would lead to an increase in output in all countries.
... In Obst et al. (2020) and Onaran/Obst (2016) the elasticity of investment with respect to the profit share, in first differences formulation, has no statistically significant effect on private investment. In Marsellou (2013) for the 1963-2003 period, however, the impact of the profit share is statistically significant and equals 0.15 and 0.31 in the ECM and the DOLS specifications, respectively. ...
... These findings are in line with the studies surveyed above that include Greece in their sample. Obst et al. (2020) and Onaran/Obst (2016) for the period 1961-2013 in first differences formulation find the elasticity of imports with respect to the terms of trade to be 0.15 but not statistically significant, and the elasticity with respect to internal demand equal to 1.27 at 1.0 per cent level. ...
... The elasticity of the domestic prices with respect to the ULC and the imports prices have the expected signs and are statistically significant at the 1.0 per cent and 5.0 per cent levels. These findings are lower than the 0.42 found in Obst et al. (2020) and Onaran/Obst (2016). The above estimated elasticities are used for the calculation of the marginal effect of a change in the wage share on the exports and imports shares in GDP. ...
This paper investigates the demand regime of the Greek economy for the period 1960–2017, using a Bhaduri/Marglin (1990) type macroeconomic demand-led model and applying the empirical methodology developed in Stockhammer et al. (2009). The analysis finds that Greece is another European economy with a wage-led demand regime, both domestically and as an open economy. Moreover, the analysis shows that the results are robust across different sample sizes, for the period 1960–2017, and the two sub-periods 1960–1989 and 1990–2017.
... Thirdly, the post-Keynesian demand-led growth models allow for multiplier effects of fiscal policy on demand (Mott/Slattery 1994;You/Dutt 1996;Blecker 2002;Seguino 2010Seguino , 2012Palley 2013;Commendatore et al. 2011;Allain 2015;Tavani/Zamparelli 2017a;Ko 2018;Hein 2018;Obst et al. 2020;Onaran et al. 2022aOnaran et al. , 2022b, which can be extended to analyse the effects of different types of government spending on not just demand but also gender distribution of income and employment as well as on the supply side on productivity. 2 Fourthly, the structural features of the economy in terms of sectoral composition, oligopolistic price setting, import dependency, balance-of-payments constraints, international currency hierarchies and unequal bargaining power between labour and capital present a realistic model of the economy and allow integrating gender inequality in the distribution of unpaid and paid work, occupational segregation and power relations. ...
... 12 11. The effects of public spending are stronger and negative effects on the current account balance are moderated, if policies are implemented simultaneously in all the countries (Onaran 2016b;Obst et al. 2020). 12. Day-to-day spending in these sectorsfor example, wages of teachers, nurses or social care workersis considered as current spending, thus not as investment, in our national accounts; however, public spending in the care economy has long-term benefits to the society as a whole, with substantial productivity impact in all other sectors of the economy by increasing the skills, health and innovative capacity of people (Elson 2016(Elson , 2017. ...
... The coordination of fiscal policies with pro-labour institutions makes the effects of fiscal spending stronger and eases the funding pressures as higher wages lead to higher tax revenues (Onaran 2016b;Obst et al. 2020;. ...
The aim of this article is to discuss why we should synthesize feminist and post-Keynesian/Kaleckian economics. We answer three related questions. Why does post-Keynesian economics need feminist economics? Why does feminist economics need post-Keynesian macroeconomics? Finally, what is the relevance of synthesizing feminist and post-Keynesian economics for policy analysis in the twenty-first century? We then present a theoretical synthesis model bringing together and extending the existing macroeconomic models in feminist post-Keynesian economics. Finally empirical findings based on this synthesis model are discussed in a policy context.
... Post-Keynesian/post-Kaleckian demand-led macroeconomic models allow for positive and negative effects of a fall in the labor share on aggregate demand (Bhaduri and Marglin 1990;Naastepad and Storm 2006;Hein and Vogel 2008;Stockhammer, Onaran, and Ederer 2009;Onaran and Galanis 2014;Onaran and Obst 2016). Extensions of these models integrate the impact of public spending and taxes (Mott and Slattery 1994;You andDutt 1996, Blecker 2002;Seguino 2010Seguino , 2012Palley 2013;Commendatore, Panico, and Pinto 2011;Allain 2015;Tavani and Zamparelli 2017a;Ko 2018;Hein 2018;Obst, Onaran, and Nikolaidi 2020). Going beyond the short-run demand effects, a series of post-Keynesian models integrate the changes in productivity (Palley 1996(Palley , 2013(Palley , 2014Casetti 2003;Stockhammer and Onaran 2004;Dutt 2006Dutt , 2010Naastepad 2006;Setterfield 2006;Seguino 2010Seguino , 2012Hein and Tarassow 2010;Tavani and Zamparelli 2017b). ...
... We expect rising women's wages to have a positive partial impact on consumption in both sectors in the short run, since we expect the MPC out of women's wages to be larger than that out of profits. This is based on previous aggregate macro-econometric estimations which find that MPC out of wages in the UK is higher than MPC out of profits (Hein and Vogel 2008;Onaran and Galanis 2014;Onaran and Obst 2016;Obst, Onaran, and Nikolaidi 2020). ...
... The results in (A) are comparable to previous research which find that the UK is a wage-led economy, although these previous results are based on the impact of the profit share on aggregate output only (Bowles and Boyer, 1995;Stockhammer and Onaran 2004;Naastepad and Storm 2006;Hein and Vogel 2008;Onaran and Galanis 2014;Onaran and Obst 2016;Jump and Mendieta-Muñoz 2017;Obst, Onaran, and Nikolaidi 2020;Oyvat, Öztunalı, and Elgin 2020). Based on our SR results for the rise in both wages in N, a 1 percentage-point fall in π leads to 0.331 percent increase in GDP after the multiplier, which is comparable to the previous research for the UK. ...
The aim of this study is to develop a model to analyze the macroeconomic effects of two dimensions of inequality – gender inequality and functional income distribution – and public spending, in particular on social infrastructure, on output, productivity, and hours of employment of men and women. This study estimates the model econometrically using an IV-GMM estimator and time series data for the period of 1970–2016 for the UK. For the estimation of productivity, the article uses IV-GMM estimations based on panel data for eighteen industries for the period of 1970–2015. The study finds that output in the UK is both gender equality-led and wage-led, and hence generally equality-led. Public social infrastructure investment has a high positive effect on both output and employment. Despite a strong positive effect on productivity, the employment of both men and women increases in the medium run.
HIGHLIGHTS
• Output in the UK is gender equality-led and wage-led; hence the UK is equality-led.
• An upward convergence in wages by closing gender pay gaps leads to higher output.
• Public social infrastructure spending has a positive effect on output and productivity.
• Public social infrastructure leads to higher employment for both men and women.
• A mix of labor market and fiscal policies can achieve both equality and employment.
... The last study listed in Table 1, Obst et al. (2020), differs from those prior in both its approach and its result. A focus of this work is the effect of increases in government spending and taxes on demand and the primary budget balance in selected EU countries. ...
... Common to all these studies is the use of GDP or GVA in the denominator of the measure of Irish functional income distribution. Moreover, none of these studies control for the effects of distortions caused by MNEs in Ireland except arguably Obst et al. (2020), which, in modeling public finances, includes a measure of the implicit tax rate on capital which may pick up some of the effects of tax competition. Of course, four of these studies estimate the demand regime not just of Ireland but of a dozen or more countries at once, making it quite understandable why Ireland does not receive the special attention it requires. ...
... In comparison to the other literature that estimates AD∕ (see Table 1), this is the most wage-led (i.e., most positive) effect found yet. Closest to these estimates is that of Obst et al. (2020), who find that AD∕ = 0.22 in Ireland, using a different modeling and empirical approach to that outlined here. ...
Most studies on the demand regime of Ireland tend to find it is profit-led. However, these studies use conventional national accounts statistics, which are grossly distorted in Ireland. Since the activities of multinational enterprises (MNEs) drive real demand on one level and severely distort conventional macroeconomic data on another, the possibility of bias due to omitted variables and measurement error arises. This paper summarizes the real and distortionary effects of MNEs in Ireland, and then adjusts and controls for these effects in an econometric estimation of the underlying Irish demand regime. It also addresses the threat of simultaneity bias by employing a three-stage least-squares approach. Ireland is found to be wage-led once the influence of MNEs is taken into account. Moreover, the average effective corporate tax rate (AECTR) on foreign affiliates in Ireland is found to be statistically significant in explaining investment. These results, alongside indicative foreign affiliate statistics, support the view that the underlying Irish economy is both wage-led and “tax competition-led” (Woodgate, Rev Keynes Econ 8:512–535, 2020), where a lower AECTR has a net positive effect on aggregate demand. It is contended that this beggar-thy-neighbor, tax competition-led regime helps explain why Ireland is profit-led in appearance rather than in effect.
... Molero-Simarro (2015) includes public investment in his estimations but is not able to analyze the behavior of private investment separately due to data limitations. Obst et al. (2017) show that government spending has a positive effect on private investment in nine EU countries and a negative effect in only one country. 5 Oyvat et al. (2018) find that countries with higher government spending-to-GDP ratios tend be more wage-led. ...
... In contrast, studies using VAR methodologies often do not report marginal effects, which means that these studies could not be included as often. Furthermore, to ensure comparability, we do not use estimates that include a (Keynesian) multiplier (Naastepad, 2006) and exclude estimates that are based on parallel increases of the wage or profit share in multiple countries (Onaran & Galanis, 2014;Onaran & Obst, 2016), other simultaneously simulated policy changes (Obst et al., 2017), simultaneous increases and/or decreases of components of the wage or profit share (Onaran et al., 2011), or interactions with productivity regimes (Hartwig, 2013). This reduces the overall number of studies that could be included from 60 to 33. 13 Nevertheless, our data set covers more than half of the available empirical studies. ...
This paper reviews the theoretical and empirical literature on the relationship between the functional distribution of income and aggregate demand, which investigates whether declining wage shares increase (“profit‐led”) or decrease (“wage‐led”) demand. It conducts a meta‐regression analysis of 33 studies with 578 estimates for total and domestic demand, covering up to 163 years and 59 countries and regions. Our results suggest that, on average and across all countries, total demand is predominantly profit‐led and domestic demand mainly wage‐led. The effects in the literature range between 0.8 and −0.3 within one standard deviation for domestic demand and between 0.4 and −0.7 for total demand, which are economically significant at the outer bounds. We find mixed evidence for publication selectivity, which may affect the size but not the direction of the results in the literature. If one was to nonetheless correct for this, then total demand would be less profit‐led or statistically insignificant. A set of moderator variables, including publication characteristics, estimation strategies, the covariates included in the studies’ estimation functions, and, in particular, controls for time and space, help explain the variation in the empirical estimates.
... However, an alternative interpretation of this debate is that it actually asks the question whether there is a trade-off between equity and efficiencyand in the case of wage-led growth, finds that this is not the case. The fact that this literature usually finds very small growth effects of redistribution towards either labour or capital (Kiefer/Rada 2015;Obst et al. 2020) supports this interpretation, which means that post-Keynesian theory and ecological economics are not in contradiction on this point. ...
... Consequently, reducing inequality and individual wealth is imperative for reducing environmental impacts. Finally, the distributional focus of post-Keynesianism can easily be expanded to intersectional inequalities like gender (Onaran et al. 2020), which also risk being amplified by global heating. ...
... Seguino (2012) underlines three key roles of public investment: stimulating demand and employment, creating productive capacity, and improving human development. Government spending boosts economic activities and equitable income distribution while also inducing private investment demand and significant productivity gains (Obst et al. 2020;Onaran et al. 2022;Oyvat and Onaran 2022). ...
... 2 The crowding-in effect of government expenditure was introduced by Dutt (2013). Obst et al. (2020) empirically find that a positive and significant effect of government spending on the firms' investment demand is dominant in several EU countries. Equation (9) is formalised on these bases. ...
We built a Kaleckian dynamic model that can comprehensively analyse the growth, distribution, and employment rate of the government's social infrastructure and debt accumulation. The model allows for not only wage-led growth and profit-led growth regimes but also labour-market-led and goods-market-led distribution regimes. Particular attention is paid to the demand effects of fiscal policy and the productivity growth effect of social infrastructure investment. Our model derives the following results. A combination of alternative growth and distribution regimes is important for stability. When government debt also changes in the long-run, the Domar condition is required for stability. Despite the principally Kaleckian nature, the long-run economic growth rate depends not on demand or fiscal parameters but on supply-side parameters. We conclude that the government can still play an important role in stabilising the economy, improving the quality of social infrastructure, and achieving a resilient economy.
... Furthermore, if new distributive policies are complemented by new fiscal policies in the Eurozone, with a balanced budget expansionary policy, the expansive effect on aggregate demand becomes much more significant (Obst et al. 2017;Uxó and Alvarez, 2017). A policy mix that links the mentioned pro-labour wage policy with an expansionary fiscal policy financed by progressive taxation would have a considerable expansionary effect. ...
... Particularly, the expansionary-inclusive effects of growth would be reinforced if a new fiscal policy is focused on promoting redistribution towards low-income families, with higher propensity to consume (for example a guaranteed income scheme for low income households to address the situation of those most affected by the crisis). As Obst et al. (2017) and Uxó and Alvarez (2017) have shown, this expansionary policy would be sustainable and compatible with a reduction of the public deficit since it would be financed by progressive taxes 5 and by the effect of growth on public revenues. ...
In the period after the Great Recession and austerity politics, we have witnessed a growing interest among international economic institutions and in mainstream economics into the relationship between inequality and sustained economic growth. The term ‘inclusive growth’ has become widely used as a lever for economic change during and after the recovery from the Great Recession. However, there is still some unclarity on the contents, desired macroeconomic outcomes and policy recommendations that should establish the backbone of this approach. This paper contributes to the debate by providing an overview of viewpoints and expanding on a strategy for inclusive growth, building on research in the field of industrial relations and labour markets institutions. We argue that two elements are missing in the current programme: the functional distribution of income and the role of institutions.
... Recent post-Keynesian empirical research indicates that in the UK, the negative effects of a decrease in the wage share outweigh any positive consequences on investment or exports. The UK grows faster when the wage share increases not when it fallsin the post-Keynesian terminology, the demand regime in the UK is "wage-led" rather than "profit-led" (Bowles and Boyer, 1995;Stockhammer and Onaran, 2004;Naastepad and Storm, 2007;Hein and Vogel, 2008;Onaran and Obst, 2016;Onaran and Galanis, 2014;Obst et al., 2017). Private investment increases as well since expectations of future sales, rather than immediate profits, boosts investment and higher wages stimulate productivity. ...
... This has characterised the last four decades in Europe, the USA as well as the emerging economiesthe domestic repression of demand has dominated the outcome in each country including the UK. We have strong empirical evidence to conclude that the UK and the EU as a whole would therefore vastly benefit from a simultaneous increase in the wage share (Onaran and Galanis, 2014;Onaran and Obst, 2016;Obst et al., 2017). ...
Purpose
The purpose of this paper is twofold: first, to reassert the persistent association of the decline in collective bargaining with the increase in income inequality, the fall in the share of wages in national income and deterioration in macroeconomic performance in the UK; and second, to present case studies affirming concrete outcomes of organisational collective bargaining for workers, in terms of pay, job quality, working hours and work-life balance.
Design/methodology/approach
The paper is based upon two methodological approaches. First, econometric analyses using industry-level and firm-level data for advanced and emerging economies testing the relationship between declining union density, collective bargaining coverage and the fall in the share of wages in national income. Second, it reports on ten in-depth case studies of collective bargaining each based upon analysis of collective bargaining agreements plus in-depth interviews with the actors party to them: in total, 16 trade union officers, 16 members and 11 employer representatives.
Findings
There is robust evidence of the effects of different measures of bargaining power on the labour share including union density, welfare state retrenchment, minimum wages and female employment. The case studies appear to address a legacy of deregulated industrial relations. A number demonstrate the reinvigoration of collective bargaining at the organisational and sectoral level, addressing the two-tier workforce and contractual differentiation, alongside the consequences of government pay policies for equality.
Research limitations/implications
The case studies represent a purposive sample and therefore findings are not generalisable; researchers are encouraged to test the suggested propositions further.
Practical implications
The paper proposes that tackling income inequality requires a restructuring of the institutional framework in which bargaining takes place and a level playing field where the bargaining power of labour is more in balance with that of capital. Collective bargaining addresses a number of the issues raised by the Taylor Review of Modern Working Practices as essential for “good work”, yet is at odds with the review’s assumptions and remedies. The case studies reiterate the importance of the development of strong workplace representation and bargaining at workplace level, which advocates for non-members and provides a basis for union recruitment, organisation and wider employee engagement.
Originality/value
The paper indicates that there may be limits to employer commitment to deregulated employment relations. The emergence of new or reinvigorated collective agreements may represent a concession by employers that a “free”, individualised, deinstitutionalised, precarious approach to industrial relations, based on wage suppression and work intensification, is not in their interests in the long run.
... From a policy perspective, since empirical research on the growth-wages nexus shows that increases in the wage share have positive effects on growth in a wide range of economies including Greece (e.g. Obst et al., 2020), our findings can also inform the public policy mixture of a more equitable, wage-led growth agenda. ...
This paper examines the determinants of the income share of wage earners in the non-financial, private sectors of Greece since its introduction to the Eurozone in 1999. The main outcome of the integration of Greece into the Eurozone has been the financialisation of its economy, which has been particularly influential for households, since it led to the rapid rise of household indebtedness. Building on recent research which shows that financialisation shapes wage bargaining outcomes, we use quarterly data from the Eurostat and demonstrate that the relative size of the FIRE sectors and the increase in household debt have been negative drivers of the wage share in Greece over the last 22 years. Our findings also suggest that the employment-tied social benefits system and tertiary education provision have also been important determinants of workers’ income share.
... La primera es que consideramos la política fiscal como gasto autónomo, por tanto, el gasto público es una variable exógena en este modelo y no está influida por el cambio distributivo. En los últimos años se han propuesto modelos que incorporan como endógenas las variables de política fiscal (Obst, Onaran & Nikolaidi, 2020). ...
This article deals with the growth drivers of Mediterranean economies (Italy, Greece, Portugal and Spain) by focusing on their business cycle dynamics since the 90s. Based on the estimation of a Kaleckian model with single equations, we combine the demand regime literature with that on growth models. We find the four economies to be wage-led, while the redistribution in favour of capital has had a significant impact on growth dynamics. This is found to be mirrored in a fall in the multiplier throughout the period, and consequently a reduction in the contributions to growth of private aggregate demand components. Regarding growth drivers, internal variables still explain most of the growth dynamic, whereas financial variables intensify rather than modify the business cycles and fail to compensate for the deceleration of economic growth.
... Specifically, You and Dutt (1996), after studying a range of different tax rates between labour and capital, come to conclude that income distribution towards labour is necessary for growth, and it can be achieved if a worker's after-tax income rises faster than interest payments on debt. Nikolaidi et al. (2020) examine the effects of fiscal policies on growth with a post-Kaleckian theoretical model and find that a rise in the labour share leads to an increase in growth. Moreover, they argue that a redistributive tax policy leads to an increase in GDP. ...
... Moreover, when dividing government expenditures between consumption and investment, the impact of each public spending becomes even larger. Lastly, Obst et al. (2020) estimate the effects of income distribution and fiscal policy for fifteen European countries. Their results display a government spending multiplier close to 2.9 for France and 1.7 for Italy. ...
This note has a twofold ambition. First, it empirically evaluates public spending multipliers for France and Italy, over the period 1986-2018, using an embryonic Keynesian model and a methodology based on cointegration with structural break. The estimates report that multipliers are above unity and statistically significant for both countries, which validates the necessity of a massive expansion in government spending during hard times. Second, it shows that during and after the Great Recession these countries never implemented a truly expansionary fiscal policy in order to reach full employment output or, at the very least, the level of output that would have prevailed without the crisis.
... This view, rooted in the preeminent contribution of Kalecki (1943), has been recently documented by many empirical studies (see, for example, Piketty and Saez, 2007;Stockhammer, 2011;OECD, 2012, p. 212;Onaran and Galanis, 2012;Hein, 2015;Hein and Prante, 2018). In addition to the macroeconomic effects on the level of aggregate demand, Walter Paternesi Meloni, Antonella Stirati some contributions have also highlighted the possible growth effects of a redistribution of income from profits to wages, or, in a similar way, of a less unequal personal distribution of income (Herzer and Vollmer, 2012;Ostry et al., 2014;Cynamon and Fazzari, 2015;Obst et al., 2020). ...
The paper explores the long-term evolution of the functional distribution of income in Italy. Specifically, we calculate the adjusted wage share (labour share) for the period 1970-2020 starting from national accounts data provided by the Italian National Institute of Statistics (Istat). In addition to the total economy, we focus on four macro-sectors, namely: a) the non- agricultural private sector (excluding real estate); b) the manufacturing sector; c) commercial and professional services; and d) financial and network services. We discuss those trends in connection with the dynamics of productivity, real wages, and relative prices. Finally, we propose some interpretations of the evolution of the labour share by looking at the macroeconomic outlook and at episodes of institutional change that took place in the period under scrutiny.
... nd tertiary education provision have also been important negative and positive determinants of workers' income share over this period, respectively. From a policy perspective, since empirical research on the growth-wages nexus shows that increases in the wage share have positive effects on growth in a wide range of economies including Greece (e.g. Obst et. al., 2020), our findings can also inform the policy mixture of a more equitable, wage-led growth agenda. ...
This paper examines the determinants of the income share of wage earners in the non-financial, private sectors of Greece since its introduction to the Eurozone in 1999. The main outcome of the integration of Greece into the Eurozone has been the financialisation of its economy, which has been particularly influential for households since it led to the rapid rise of household indebtedness. Building on recent research within industrial relations, sociology of work, and political economy, which shows that financialisation is a key driver of wage bargaining outcomes, we demonstrate that the relative size of the FIRE sectors and the increase in household debt have been negative drivers of the wage share in Greece over the last 22 years. Our findings also suggest that the employment-tied social benefits system and tertiary education provision have also been important determinants of workers' income share.
... π t (1 − t R t ) is the after-tax share of disposable profits in N. Following Amit Bhaduri and Stephen Marglin (1990), we expect the profit share to have a positive direct impact on private investment (i 2 > 0). Last, we use the ratio of public debt to GDP, (D/Y ) t , to consider the possible negative crowding out effects of rising public debt on the interest rate and thereby, private investment (i 3 < 0), as in Thomas Obst, Özlem Onaran, and Maria Nikolaidi (2020). ...
The aim of this study is to develop a feminist Post-Keynesian/Post-Kaleckian model to theoretically analyze the effects of labor market and fiscal policies on growth and employment. The study develops a three-sector gendered macroeconomic model with physical and social sectors (health, social care, education, childcare) in the public and private market economy, and an unpaid reproductive sector providing domestic care. It provides a theoretical analysis of the effects on GDP, productivity, and employment of men and women in both the short and long run, as a consequence of (1) fiscal policies, in particular public spending on social infrastructure, and (2) decreasing gender wage gaps, particularly within the social sector dominated by women. This theoretical analysis provides a basis to further analyze the impacts of an upward convergence in wages, other types of fiscal spending, and taxes.
HIGHLIGHTS
• The study develops a feminist Post-Keynesian model to aid policy analysis and gender-responsive budgeting.
• Public social expenditure decreases gender inequality by reducing women’s unpaid work burden.
• Social spending creates more employment for women than physical infrastructure and closes gender gaps in employment.
• Social spending can increase productivity, partially moderating the employment impact of spending.
• If the economy is wage-led, more progressive taxes increase output.
... Specifically, You and Dutt (1996) after considering a range of different tax rates between labor and capital, come to conclude that income distribution is necessary for growth, and it can be achieved if worker's after-tax income rises faster than interest payments on debt. Nikolaidi et al. (2020)) examine the effects of fiscal policies on growth with a post-Kaleckian theoretical model and find that a rise in the labor share leads to increase to growth. Moreover, they argue that a redistributive tax policy leads to an increase in GDP. ...
The Great Recessionary period followed after the 2008 crisis, had a severe impact on European Union's debt-to-GDP dynamics. The austerity measures that were implemented to highly indebted economies, failed to stimulate GDP and to stabilize debt. Our aim in this paper is to design a set of fiscal policy rules that would simultaneously provide GDP growth and debt reduction, using a linear, time-lagged, discrete macroeconomic Kaleck-ian model. Algebraic methods with appropriate symbolic algorithms are developed through the utilization of feedback control techniques, generating a solution, which allows us to find a path for the GDP and debt desired 1 targets to be met. As a conclusion, this study argues that expansionary fiscal policy can be a powerful tool for stimulating the economy.
... Indeed, a strong significant effect of debt and property prices on consumption and investment of OECD countries is found in Stockhammer and Wildauer (2016). In Obst et al. (2017), the incorporation of taxes on capital and labor in a Post-Kaleckian open-economy model increases the likelihood of a wage-led demand regime, while the integration of public spending increases multiplier effects and amplifies the wage-led outcome. Therefore these studies stress the need to consider the role of labor market dynamics, debt, and other financial variables as well as that of government spending in the definition of demand regimes. ...
In the Kaleckian theoretical framework, an economy's demand regime is characterized as either wage-led or profit-led depending on the relative effect of an increase in the wage share on consumption, investment, and net exports. Based on this framework, a vast empirical literature has focused on estimating demand regimes in numerous countries. Although they contribute to a better understanding of the relationship between distribution and demand in different economies and time periods, they also face various critiques on theoretical and methodological grounds. This paper aims to address one dimension of these critiques by investigating a potential omitted-variable bias in the estimated relationship between distribution and demand in the Brazilian economy between 1997 and 2014. Our results suggest that when controlling for some of the relevant factors in Brazil's inclusive growth experience of the early twenty-first century, namely wage inequality, commodity prices, and household credit, the empirical characterization of the Brazilian demand regime as profit-led loses its statistical significance. Also, the demand-regime definition was found to be most sensitive to intra-wage distribution, confirming previous findings in the Kaleckian empirical literature for the Brazilian case.
... Khotari et al. (2014) , Schoder (2014) , Girardi and Pariboni (2020) and assessed the positive role of aggregate demand, and particularly its autonomous components, in shaping the process of capital formation. Moreover, several works belonging to the wage/profit-led literature that estimates an investment function found poor or not significant profitability effects and larger GDP effects ( Naastepad and Storm, 2006 ;Hein and Vogel, 2008 ;Obst et al., 2017 ). Finally, the insensitivity of investment to interest rates has been documented by Sharp and Suarez (2014) , while Deleidi (2018) finds no significant relationship between loans granted to enterprises and the corresponding interest rates. ...
After the 1980s, advanced capitalist economies witnessed a significant decline of the wage share in income. Along with the conventional view, which ascribes this decline to technological factors and international trade, another line of enquiry has endorsed a ‘political economy’ approach and identified several drivers of the wage share erosion. Yet, the role of persistent changes in unemployment has remained relatively unexplored. We try to fill this gap moving from a recent contribution by Anwar Shaikh, who analyzed the relation between unemployment and changes in income distribution in the US economy. We study this relationship by adopting a long-term approach, and two alternative measures of labor market slack. We extend Shaikh's method of analysis to eight mature economies, and we carry out the analysis using further econometric techniques. Results generally confirm the adverse impact of unemployment on the labor share, while do not support the notion of equilibrium unemployment.
... Khotari et al. (2014), Schoder (2014), Girardi and Pariboni (2020) and assessed the positive role of aggregate demand, and particularly its autonomous components, in shaping the process of capital formation. Moreover, several works belonging to the wage/profitled literature that estimates an investment function found poor or not significant profitability effects and larger GDP effects (Naastepad and Storm, 2006;Hein and Vogel, 2008;Obst et al., 2017). Finally, the insensitivity of investment to interest rates has been documented by Sharp and Suarez (2014), while Deleidi (2018) finds no significant relationship between loans granted to enterprises and the corresponding interest rates. ...
After the 1980s, advanced capitalist economies witnessed a significant decline of the labor share in income. Along with the conventional view, which ascribed this decline to technological factors and international trade, another line of enquiry has endorsed a 'Political Economy' approach to identifying several drivers of the labor share erosion. Among the latter, the role of persistent labor market slack has remained relatively unexplored. We try to fill this gap moving from a recent contribution by Anwar Shaikh, who elaborated on the relation between unemployment and changes in income distribution in the US economy. We study this relationship by adopting a long-term approach, using two alternative measures of labor market slack (namely, the unemployment rate and the unemployment intensity, an index that incorporates the duration of unemployment). We first extend Shaikh's method of analysis to eight mature countries, and subsequently we approach the relationship between changes in labor market slack and the (adjusted) wage share in the private sector of the economy from 1960 to 2017 with other econometric techniques. Our findings confirm the existence of a negative relationship between labor market slack and the wage share, and we find no tendency to return to a 'normal' unemployment rate associated with a stable wage share.
... Coordination was also key in the response to the Global Financial Crisis in 2009. Such wage increases would also best be associated with a concomitant expansionary fiscal policy (Obst, Onaran & Nikolaidi, 2017). Perhaps the newly-found celebrity of the advocates of Modern Monetary Theory (MMT)-a branch of post-Keynesian economics that minimizes the financial dangers of public debt-will induce more governments to go ahead with such policies, although, once again, one may fear that MMT scriptures may not fully apply to emerging economies (Bonizzi, Kaltenbrunner & Michell, 2019). ...
... The Kaleckian growth literature largely overlooks fiscal policy, with the exception ofObst et al. (2017) who incorporate the impact of fiscal policy into an open-economy,Bhaduri-Marglin (1990) model, focusing on estimating the cross-country effects of changes in government spending and income distribution, in a panel data context. ...
This paper provides a demand-driven growth model of Kalecki’s
(1943) political business cycle. It incorporates the three fundamental assumptions that govern Kalecki’s model: wage-led demand, the “reserve army of labor” effect, and capitalists’ disproportionate power over fiscal policy. In our model, endogenous cycles are the outcome of capitalists’ changing preferences over fiscal policy. Decreasing opposition to fiscal expansion by capitalists triggers the boom phase of the cycle, lest demand deficiency lead to a slowdown in accumulation. The downturn of the cycle is induced by capitalists’ rising opposition to government spending, lest workers’ growing political power at the peak of the cycle undermine their influence. This approach is unlike that taken by Goodwin and neoclassical PBC models, where a profit squeeze and the timing of elections or political
ideologies determine cycles.
... Above all, the model uses a socialaccounting methodology to assess cross-border spillovers and the potential for international macroeconomic policy coordination, an issue that has recently attracted much-deserved interest (e.g. Obst et al., 2017;Onaran and Galanis, 2014;Onaran and Obst, 2016;Storm, 2016). In addition to spillovers, and in connection with the Balance of Payments Constrained Growth (BoPCG) literature, we derive the level of government expenditure consistent with balanced trade and the maximum GDP growth rate relative to trade partners, consistent with an unchanged trade balance (Section 2). ...
We investigate the potential of European-wide Keynesian policies as an alternative to the current neoliberal response to trade imbalances. In particular, we examine the implications for balancing trade of an uncoordinated fiscal policy expansion, and whether coordinated reflationary measures in core Eurozone countries could promote balanced trade and significant growth in peripheral countries. Accordingly, we analyse the structural interdependencies in income and trade between peripheral and central Eurozone countries, such as Spain and Germany. To this end, we employ a comprehensive set of accounting multipliers derived from a Keynesian supermultiplier model that accounts for interindustrial and interregional relations in a global setting. Computations rely on global input-output tables and national accounts that cover the years 1995 to 2014. We conclude that scepticism about the effectiveness of relying solely on Keynesian measures as an alternative to neoliberal policies in Europe is in order.
It is debated to what extent corporate taxation discourages capital formation, and the related empirical cross-country evidence is inconclusive. This paper provides new insights into this matter for a large sample of developed and developing countries. In the first step, national accounts data is used to calculate backward-looking effective corporate income tax rates (ECTR) for 77 countries during 1995–2018. In the second step, dynamic panel data regressions are used to estimate the effect of ECTR on aggregate corporate investment. The main findings of this exercise are that (i) statutory corporate income tax rates (SCTR), on average, are twice as high as ECTR, (ii) average ECTR has been relatively stable but show distinct dynamics across countries and (iii) no significant negative relationship exists between ECTR and investment. The latter finding is robust to different specifications and samples and when publicly available SCTR or forward-looking effective tax rate measures are used as alternative tax rate proxies.
This study estimates the relative effect of fiscal policy on income inequality and health outcomes in Sub-Saharan Africa (SSA) countries. The study covers the period 2010–2022 using panel data on 12 countries. Estimation is done using the System GMM estimation technique. It is shown that income tax (ICT) exerts a positive and significant effect on MORT. Government health expenditure (GXH) and population growth (POP) negatively but insignificantly influence MORT, while the effect of carbon emission (CO2) is positive, but not statistically significant. The effect of health-oriented development assistance (HODA) on MORT is negative and statistically significant. Additionally, government health expenditure (GXH) exerts a positive but insignificant effect on LFX. The effect of health-oriented development assistance (HODA) on LFX is also positive and statistically significant. Both income tax (ICT); the effect of POP is negative and significant. Finally, the study reveals that a one-period lag in income inequality (INQ) has a negative and significant effect on current INQ. In addition, government health expenditure (GXH), income tax (ICT), and population growth all exert a negative effect on INQ, with ICT being the most significant of all of them. The effect of health-oriented development assistance (HODA) and carbon emission (CO2) is found to be positive, but not statistically significant. Amongst others, the study recommends that countries across SSA formulate policies that will help in slowing down population growth to levels that are manageable and will not pose adverse health challenges in the region.
For the last two decades an increasing number of empirical studies have analysed the relationship between income inequality and economic growth by classifying economies as either wage-led or profit-led. However, some critiques have claimed that rather than being unequivocally wage-led or profit-led, the growth regime of an economy might depend on the circumstances and the nature of the processes that determine income distribution. Using an empirical stock-flow consistent (SFC) model estimated for Denmark for 2005–2020 we run eight scenarios simulating changes in policy, structural and institutional variables to see how each affects income distribution and, through it, the business cycle and economic growth. We find that the relationship between demand, growth and income distribution is highly dependent on the source of the shock affecting income shares, its impact on the other areas of the economy and the intensity of feedback effects.
This study estimates the relative effect of fiscal policy on income inequality and health outcomes in Sub-Saharan Africa (SSA) countries. The study covers the period 2010–2022 using panel data on 12 countries. Estimation is done using the System GMM estimation technique. It is shown that income tax (ICT) exerts a positive and significant effect on MORT. Government health expenditure (GXH) and population growth (POP) negatively but insignificantly influence MORT, while the effect of carbon emission (CO2) is positive, but not statistically significant. The effect of health-oriented development assistance (HODA) on MORT is negative and statistically significant. Additionally, government health expenditure (GXH) exerts a positive but insignificant effect on LFX. The effect of health-oriented development assistance (HODA) on LFX is also positive and statistically significant. Both income tax (ICT); the effect of POP is negative and significant. Finally, the study reveals that a one-period lag in income inequality (INQ) has a negative and significant effect on current INQ. In addition, government health expenditure (GXH), income tax (ICT), and population growth all exert a negative effect on INQ, with ICT being the most significant of all of them. The effect of health-oriented development assistance (HODA) and carbon emission (CO2) is found to be positive, but not statistically significant. Amongst others, the study recommends that countries across SSA formulate policies that will help in slowing down population growth to levels that are manageable and will not pose adverse health challenges in the region.
El propósito del artículo es realizar una propuesta de política económica sobre dos pilares
para afrontar los nuevos (y viejos) retos socioeconómicos (globalización, progreso y cambio
tecnológico, cambios demográficos, desigualdad y creciente polarización social y el cambio
climático, entre otros). El artículo se centra en una propuesta de política económica con
dos pilares: a) el fortalecimiento del estado del bienestar y b) la aplicación de una política
de rentas permanente que en el medio y largo plazo permita la subida salarial acorde con
el crecimiento de la productividad y, por consiguiente, mejore la distribución primaria de
la renta en nuestro país.
This paper investigates non-cyclical, short-run relationships between income distribution and the components of aggregate demand in the US from 1963–2016. Previous studies using this ‘structural’ methodology have typically found that demand is wage-led in most large, advanced economies. However, these studies have been criticised for treating total output and the wage share as exogenous, potentially leading to simultaneity bias. This paper corrects for such possible bias as well as common shocks to the equations by using systems GMM. Surprisingly, these estimates imply that private-sector aggregate demand is more, rather than less, wage-led (or in some cases, less profit-led) compared with OLS estimates of identically specified models. This paper is also the first to provide separate estimates of non-residential and residential investment functions and to distinguish the effects of shocks to different underlying determinants of the wage share (unit labour costs and firms’ monopoly power), finding that these differ qualitatively.
Since the global financial crisis there has been growing interest in Post-Keynesian macroeconomic theory by political economists. In particular, the recent Growth Models approach in Comparative Political Economy (CPE) draws heavily on Kaleckian macroeconomics of demand regimes. This paper, firstly, traces the disintegration of nineteenth-century political economy and highlights that many streams within heterodox economics are a continuation of the political economy project, as are the sub-fields of CPE and International Political Economy in the social sciences. Secondly, the paper gives an overview of the Growth Models approach and its relation to Post-Keynesian Economics (PKE). It clarifies different strategies of identifying growth models empirically, namely GDP growth decomposition versus analysing growth drivers, and it highlights changes in growth models since the global financial crisis. Finally, it identifies opportunities and challenges that emerge from a continued engagement of PKE with political economy and with CPE in particular.
A plethora of literature documents the worldwide decline in the labor income share since the 1980s, but relatively little attention is given to the effect of changes in the labor income share on macroeconomic fluctuations. Utilizing a sign-restricted VAR model, this paper studies how changes in the labor income share affect business cycle fluctuations for the US and Korea. In line with the existing literature, I identify two structural shocks impinging on the labor income share—the factor share and technology shocks, which result in different short-run dynamics in the labor income share and real wages. Empirical analyses reveal that, for both countries, the macroeconomic consequences of a rising labor income share hinge upon how real wages respond. In the short run, a higher labor income share accompanied by rising real wages tends to be expansionary, but an increase in the labor income share coinciding with falling real wages results in lower GDP.
Many economists argue that fiscal balance (i.e. preventing fiscal deficits and establishing rules for government lending) positively affects the growth rate. Several studies document a strong correlation between these two variables based on the Ricardian equivalence theorem and the crowding-out effect. It may be argued that high growth rates lead to a positive fiscal balance, while lower/negative growth rates lead to deficits (but not vice versa). This study examines this cause-and-effect relationship via a sample of four EU countries that have been affected by the economic crisis. Specifically, a Granger causality analysis captures the linear interdependencies among multiple time series to determine the causal relation between the budget deficit and the GDP growth rates for Greece, Italy, Spain, and Portugal. The results show that no clear rule governs the cause-and-effect relationship between the GDP growth rates and net government lending rates (as a percentage of GDP). Moreover, the literature supports the idea that fiscal improvement may lead to economic growth, while improving net government lending leads to an increase in the GDP growth rate. This study suggests some useful fiscal policies to apply during a crisis. Also, investigating government lending can be useful in a post-COVID-19 economic environment.
El presente trabajo diseña una política de rentas que podríamos llamar “pre-distributiva”. Su principal objetivo es describir la arquitectura de una política de rentas amplia, que tendría, básicamente, tres pilares: a) el reforzamiento de la capacidad redistributiva de la negociación colectiva, b) el establecimiento de una “norma salarial redistributiva” coordinada a nivel europeo y c) el aumento del Salario Mínimo Interprofesional. Dicha política de rentas podría contribuir a una distribución más equitativa de las rentas primarias del trabajo.
Over the past decades, there have been significant changes in the functional income distribution. The decreasing wage share in national income, the causes and consequences of this phenomenon have become the subject of both research and political debate. Over the past decade, research in the most developed countries has shown that economic growth has been influenced by wage share rather than a profit share. The decline in the wage share in countries’ incomes may have been the cause of slowing economic growth or a sluggish post- crisis recovery (Blecker, 2016). The decline in the wage share is one of the key aspects of changes in income change, which also includes an increase in personal income inequality (Hein, 2015). Although much research has been done on changes in the distribution of personal income, the problem of the functional income distribution has not been sufficiently explored.
The concepts of income distribution and functional income distribution seem similar at first glance, but this is not the case. The distribution of income is described as the income earned in a country’s economy distributed among the total population. This indicator is usually calculated at the household level (i.e. the total income of all household members is calculated), taking into account the number of household members and their age. Meanwhile, the functional distribution of income is described as the distribution of national income between the two factors of production – labour and capital. This means that income is distributed between employees and capital owners. Theoretically, it is stated that 2/3 of income goes to labour and 1/3 to capital. The impact of changes in wage and profit shares on aggregate demand is quite complex and depends, among other things, on the country specification, data sources and coverage, the measurement of different variables and the statistical methods used in the surveys. Bhaduri and Marglin (1990) analyzed the impact of changes in the functional distribution of income on consumption, investment, exports, and imports. The essence of the model is that wage share has a dual effect on the economy, at the same time it is business expenditures and the main factor of private household consumption (Storm andNaastepad, 2017). As the effects of changes in the functional distribution of income impact the components of aggregate demand in national income differently, the ultimate impact on aggregate demand is not clear. If the decline in the wage share has a positive effect on aggregate demand, it is considered to be profit- led aggregate demand, if it has a negative effect, demand is wage-led.
In the macroeconomic field, aggregate demand is understood as the total amount of final products and services produced in a country over a period of time that buyers can and want to purchase at a certain price level. Gross demand consists of 4 components: consumption, investment, exports and imports. This is the demand for the country’s gross domestic product (Basu and Gautham, 2019). By way of analysis, the main determinants of aggregate demand included in the researches can be identified. The most frequently included factors in the investment function are income, wage, profit, less frequently used factors are inequality of personal income and marginal propensity of employees to consume. In investment functions, the main factors are income, profit and wage income. Factors such as capacity utilization and business expectations are less frequently included in investment functions. The rest of the world’s income and export prices are usually included factors in the export function. However, less frequently included factors in the export function are housing assets. On the other hand, import prices and unit labor costs are the most commonly influenced factors in the import function. Less commonly used factors in the import function are investment costs.
Based on the Bhaduri and Marglin model, a number of studies have been conducted to assess the impact on consumption, investment, import, export and to determine whether the economy is wage-led or profit-led (Naastepad and Storm, 2006; Hein and Vogel, 2008; Stockhammer and Ederer, 2007; Stockhammer and Stehrer, 2011; Onaran and Galanis, 2014). In their research, the authors make a clear distinction in which countries aggregate demand is profit-led and which is wage-led. In empirical studies, economic growth is stimulated either by exports or domestic demand. In the post-war period, most studies found wage-led domestic demand in almost all countries, but net exports can turn a particular economy into a profit-led one. Some researchers have studied the impact of changes in the functional income distribution on aggregate demand in individual countries, while others in groups of countries. In most of the countries (UK, Italy, Netherlands, Austria, Norway, Sweden, Denmark) analyzed in the empirical studies, domestic and aggregate demand was wage-led. Also, economic growth in most countries was driven more by domestic demand than by export. One of the worst examples of increasing economic growth is noticeable in Spain. The aim was to do this through internal devaluation – by reducing unit labor costs. However, the increase in net exports was smaller than the decrease in domestic demand, which had a negative impact on economic growth.
This contribution to the Forum Debate on global development focuses on the dimension of functional income distribution between labour and capital and its demand‐side and supply‐side effects. The article summarizes recent literature that has sought to explain the reasons behind the global fall in the labour share. It then discusses the demand‐side effects of the declining wage share on growth, based on the post‐Keynesian/post‐Kaleckian literature. The author presents an alternative policy scenario for the G20 based on a mix of increasing wage share and public investment, before discussing the supply‐side effects of rising inequality. The article concludes with some policy implications for equality‐led development.
This paper examines the long-run fluctuations in growth and distribution through the prism of wage- and profit-led growth. It argues that the relation between distribution of income and growth changes over time and proposes an endogenous mechanism that leads to fluctuations between wage- and profit-led periods. The ephemeral character of distribution-led regimes needs to be taken into account when someone estimates empirically the effect of a change in distribution on utilization and growth. The model is a linear version of Goodwin’s predator-prey model, but with a reversal of the roles for predator and prey; this is another way to conceptualize the symbiosis between the two classes within a capitalist economy. The aforementioned argument is also examined in relation to the double movement of Karl Polanyi and the inverse U-shaped curve proposed by Simon Kuznets.
This paper estimates a multi-country demand-led growth model for the EU15. A decrease in the share of wages in national income
in isolation leads to lower growth in Finland, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Portugal, Spain,
Sweden and the United Kingdom, whereas it stimulates growth in Austria, Belgium, Denmark and Ireland. However, a simultaneous
decline in the wage share leads to an overall decline in EU15 GDP; hence, the EU15 as a whole is a wage-led economy. Furthermore,
Austria and Ireland also experience a decline in growth when they decrease their wage share along with their trading partners.
The results indicate that the decline in the wage share had significant negative effects on growth in the EU15 and supports
the case for wage coordination. We present different wage-led recovery scenarios and the effects on prices, investment and
net exports.
We study a demand-driven growth and distribution model with a public sector, both without and with government debt. Government spending is used to finance the accumulation of public capital and to
pay wages to public employees. The interaction between public capital and induced technical change makes long-run growth: (i) hump-shaped in the composition of government spending, (ii) wage-led, and (iii) government spending-led. Provided that the interest rate on government bonds is kept sufficiently below the growth rate, the size of government debt is irrelevant for long-run growth.
This paper presents a theoretical and empirical investigation of how changes in the size distribution of income can affect
aggregate demand and the demand regime of an economy. After presenting empirical evidence for the US economy that the propensity
to save increases significantly from the bottom to the top quintile of wage earners, we demonstrate that more equal distributions
always lead to higher output in the traditional neo-Kaleckian macroeconomic model. We also present conditions under which
a reduction of income inequality among workers results in demand becoming more wage led. This view is supported by the results
of an econometric study for the USA (1967–2010), which show that the rise after 1980 in income inequality has made the US
economy more profit led.
Policies designed to pursue an equity-led macroeconomic growth strategy must take into account feedback effects, with distribution itself influencing macroeconomic outcomes. Under the right conditions, a more equitable distribution of income and opportunities in the form of human development can be a stimulus to growth, funding further investments in human development. Developing the policies to create those conditions is the central challenge for any human development-centered macroeconomic framework. I review here some macro-level policies that achieve this goal, identifying a key role for fiscal policy to raise productivity and for monetary policy to expand employment, a central goal of any macro-inclusive strategy.
An increase in the wage share has contradictory effects on the subaggregates of aggregate demand. Private consumption expenditures ought to increase because wage incomes typically are associated with higher consumption propensities than capital incomes. Investment expenditures ought to be negatively affected because investment will positively depend on profits. Net exports will be negatively affected because an increase in the wage share corresponds to an increase in unit labour costs and thus a loss in competitiveness. Therefore, theoretically, aggregate demand can be either wage-led or profit-led depending on how these effects add up. The results will crucially depend on how open the economy is internationally. The paper estimates a post-Kaleckian macro model incorporating these effects for the Euro area and finds that the Euro area is presently in a wage-led demand regime. Implications for wage policies are discussed. Copyright The Author 2008. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.
This paper investigates the effects of financialisation and functional income distribution on aggregate demand in the USA by estimating the effects of the increase in rentier income (dividends and interest payments) and housing and financial wealth on consumption and investment. The redistribution of income in favour of profits suppresses consumption, whereas the increase in the rentier income and wealth has positive effects. A higher rentier income decreases investment. Without the wealth effects, the overall effect of the changes in distribution on aggregate demand would have been negative. Thus a pro-capital income distribution leads to a slightly negative effect on growth, i.e. the USA economy is moderately wage-led. Copyright The Author 2011. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.
We analyse the relationship between functional income distribution and economic growth in Austria, France, Germany, the Netherlands,
the UK and the USA from 1960 until 2005. The analysis is based on a demand-driven distribution and growth model for an open
economy inspired by Bhaduri and Marglin, which allows for either profit- or wage-led growth. We find that growth in France,
Germany, the UK and the USA has been wage-led, whereas Austria and the Netherlands have been profit-led. In the case of Austria
a domestically wage-led economy changes to profit-led when including the effect of distribution on external trade. The Netherlands,
however, are already profit-led without external trade. Our results so far only partially confirm Bhaduri and Marglin's theoretical
conclusion that wage-led growth becomes less feasible when the effects of distribution on foreign trade are taken into account.
This article explores some key aspects of the debate about the potential efficacy of a fiscal rule that sets a government expenditure ceiling for the stabilization of the public debt-to-output ratio. We develop a demand-led macromodel that assumes a closed economy operating with excess productive capacity and show that a fiscal rule that sets a limit for government spending, excluding the payment of interests, may not ensure a non-explosive trajectory of the public debt-to-output ratio. Our model allows us to map out different outcomes in terms of the stabilization of the public debt stemming from the process of fiscal consolidation and conclude that the commitment of the fiscal authority to comply with the ceiling by cutting government spending is less likely to stabilize the public debt-to-output ratio in economies enduring excessively high interest rates accompanied by more regressive taxation systems. Our model also suggests that a more progressive tax structure may often increase the chances of achieving public debt stabilization in the long run.
This article presents the Kaleckian model of growth and distribution that sets a budget deficit ratio as an indicator of fiscal policy and examines the short- and long-run effects of an increase in budget deficits and a rise in income tax rates on the economy. The key short-run outcomes are as follows. First, expanded budget deficits have a positive effect on the rate of capacity utilization. Second, the tax rate for wage income does not affect the rate of capacity utilization, whereas the tax rate for capital income has a favorable impact on it. This result implies that raising the tax rate for capital income can be an important policy instrument for stimulating the economy. Third, we find that the economy exhibits a wage-led aggregate demand in the short run. The main long-run results are as follows. First, the effect of expanded budget deficits on the growth rate is ambiguous, since a higher debt burden negatively influences the rate of capacity utilization and hence economic growth, despite the increase in demand caused by government borrowing. A higher budget deficit ratio thus raises the growth rate only if a certain condition is satisfied. Second, the tax rate for capital income has a positive impact on the growth rate. Third, the economy shows a wage-led growth in the long run.
This article is linked to some recent attempts at including a noncapacity creating autonomous expenditure category as the driver and determinant of growth into Kaleckian distribution and growth models. Whereas previous contributions have focussed on taming Harrodian instability, generated by the deviation of the goods market equilibrium rate of capacity utilization from a normal or target rate, we rather focus on the so-far neglected issues of deficit, debt, and distribution dynamics in such models. For this purpose, we treat the growth of government expenditures on goods and services, financed by credit creation, as the exogenous growth rate driving the system. We examine the long-run convergence of the system toward such a growth rate, analyze the related debt dynamics, and deal with stability and income distribution issues. Finally, we touch upon the economic and, in particular, fiscal policy implications of our model results.
In the aftermath of the Great Recession, governments have implemented several policy measures to counteract the collapse of the financial sector and the downswing of the real sector. Within a framework of Minsky–Veblen cycles, where relative consumption concerns, a debt-led growth regime and financial sector confidence constitute the main causes of economic fluctuations, we use computer simulations to assess the effectiveness of such measures. We find that the considered policy measures help mitigate the impact of financial crises, though they do so at the cost of shortening the time between financial crises. This result is due to a relatively fast recovery of solvency and confidence induced by the policy measures under study which contribute to an increase in private credit and, thereby, effective demand. Our results suggest that without the strengthening of financial regulation, any policy intervention remains incomplete.
The macroeconomic development of most major industrial economies is characterised by boom-bust cycles. Normally such boom-bust cycles are driven by specific sectors of the economy. In the financial meltdown of the years 2007–2009 it was the credit sector and the real-estate sector that were the main driving forces. This book takes on the challenge of interpreting and modelling this meltdown. In doing so it revives the traditional Keynesian approach to the financial-real economy interaction and the business cycle, extending it in several important ways. In particular, it adopts the Keynesian view of a hierarchy of markets and introduces a detailed financial sector into the traditional Keynesian framework. The approach of the book goes beyond the currently dominant paradigm based on the representative agent, market clearing and rational economic agents. Instead it proposes an economy populated with heterogeneous, rationally bounded agents attempting to cope with disequilibria in various markets.
Wage shares have declined substantially in all OECD countries and most developing economies since 1980. This study uses a new ILO/IILS dataset on adjusted wage shares for a panel of up to 43 developing and 28 advanced economies (1970-2007) to explain changes in wage shares and assess the relative contributions of technological change, financialization, globalization and welfare state retrenchment. We find strong negative effects of financialization as well as negative effects of welfare state retrenchment. Globalization has (in production) robust negative effects in advanced as well as in developing economies, which is at odds with the Stolper-Samuelson theorem. We find small, and for developing countries positive effects of technological change. Our results support a Political Economy approach to explaining income distribution.
This article presents a basic Kaleckian model, enriched by the simultaneous addition of an Harrodian investment function and
an autonomous expenditure component that grows at an exogenous rate. The model shows that the usual short-run properties (wage-led
growth) are only transient, since the long-run growth rate converges towards that of autonomous expenditures. However, the
impact on the level of variables (output, capital stock, labour, etc.) is permanent. The model also provides a conditional
solution to the ‘second’ Harrod knife-edge problem: the destabilising behaviour of firms (as they adjust their investment
decisions to the discrepancy between the actual and the normal rates of capacity utilisation) is now required to achieve the
normal rate of capacity utilisation.
This paper estimates the effects of a change in the wage share on growth at global level in the G20 countries. A decrease in the wage share in isolation leads to lower growth in the euro area, Germany, France, Italy, the UK, the US, Japan, Turkey, and South Korea, whereas it stimulates growth in Canada, Australia, Argentina, Mexico, China, India, and South Africa. However, a simultaneous decline in the wage share in all these countries leads to a decline in global growth. Furthermore, Canada, Argentina, Mexico, and India also experience negative effects on growth when they decrease their wage share along with their trading partners. The results indicate that the global decline in labour share has had significant negative effects on growth.
I apply a meta-regression analysis to a unique data set of 104 studies on multiplier effects to derive stylized facts and quantify the differing effectiveness of the composition of fiscal impulses, adjusted for study design characteristics. Public spending multipliers are close to 1 and about 0.3 to 0.4 units larger than tax and transfer multipliers. Public investment multipliers are even larger than those of spending in general by approximately 0.5 unit. Multipliers vary with study design, whose influence should be laid open when drawing policy conclusions. The analysis provides guidance concerning influential factors, their significance, and magnitude.
This paper develops a simple Keynesian model of growth with endogenous technological change in which the long-run rate of growth of the economy is determined by both demand and supply forces to examine the effects of government fiscal policy. The paper first assumes that the government budget is balanced and shows that the long-run rate of growth of the economy is path-dependent, that fiscal policy affects the rate of growth of the economy in the short run as well as the long run, and that different types of government spending have different effects. It then introduces government deficits and debt into the analysis to show that even if one takes into account adverse effects of debt accumulation on long-term interest rates and investment, fiscal expansion can have positive growth effects.
This paper compares Cambridge and neo-Kaleckian growth theory. Both are members of the post-Keynesian approach to growth and distribution, but the Cambridge model is a hybrid of Keynesian and classical features whereas the neo-Kaleckian model is Keynesian. The Cambridge approach assumes full capacity utilization, while the neo-Kaleckian approach assumes variable capacity utilization. The two theories rely on fundamentally different theories of income distribution. The Cambridge model has a class structure of saving that generates Pasinetti’s (1962) theorem regarding irrelevance of worker saving for steady-state growth and distribution. That class structure can be included in the neo- Kaleckian model, generating a variant of the Pasinetti result whereby steady-state capacity utilization is independent of worker saving. Fiscal policy has similar growth effects in the two models, albeit via very different mechanisms. Both models suffer from lack of attention to the labor market.
This paper develops a stock-flow consistent macrodynamic model in which firms’ and banks’ desired margins of safety play a central role in macroeconomic performance. The model incorporates an active banking sector and pays particular attention to the leverage of both firms and banks. It is shown that the endogenous change in the desired margins of safety of firms and banks is likely to transform an otherwise stable debt-burdened economy into an unstable one. The endogeneity of the desired margins of safety can also produce, under certain conditions, investment and leverage cycles during which investment and leverage move both in the same and in the opposite direction. Furthermore, the paper investigates the potential stabilising role of fiscal policy. It is indicated that fiscal policy can reduce the destabilising forces in the macroeconomy when government expenditures adjust adequately to variations in the divergence between the actual and the desired margins of safety.
This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
In this paper, we estimate the cross-country spillover effects of government purchases on output for a large number of OECD countries. Following the methodology in Auerbach and Gorodnichenko (2012a, b), we allow these multipliers to vary smoothly according to the state of the economy and use real-time forecast data to purge policy innovations of their predictable components. We also consider the responses of other key macroeconomic variables. Our findings suggest that cross-country spillovers have an important impact, and also confirm those of our earlier papers that fiscal shocks have a larger impact when the affected country is in recession.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
This paper develops a simple two-country stock-flow consistent model based on that of Godley and Lavoie (2007b). In order to motivate the use of stabilisation policies, persistent inflationary pressure and endogenous economic cycles are introduced into the model. Three scenarios are then simulated: a step decrease in real exports from country B, increased wage pressure in country B and an income tax cut in country A. In all cases, monetary and fiscal policies in isolation enjoy little success but a combined monetary and fiscal approach to stabilisation proves highly effective. Moreover, the model suggests that the pursuit of autonomous inflation targeting in each country introduces excessive exchange rate volatility relative to an alternative rule in which one central bank takes a leading role in interest rate setting.
This paper examines the fiscal requirements for continuous full employment. We find that (i) changes in the financial behavior of households and firms require adjustments in tax rates and public debt, (ii) the stability of the steady-state solution for public debt depends on the .fiscal instrument and the household consumption function, (iii) in stable cases, a fall in government consumption (or a decline in another component of autonomous demand) requires an increase in the steady-state ratio of public debt to capital, and (iv) the steady-state tax rate may be positively or negatively related to the level of debt. JEL Categories: E62, E22
This paper deals with the influence of different types of government expenditure on growth in a post-Keynesian framework. The analysis considers a government sector with a balanced budget and an autonomous and non-linear investment function, interpreted along a Kaleckian and a Classical-Harrodian line. It shows under which conditions different types of government expenditure are beneficial or detrimental for economic growth, comparing some results with those reached by Barro in his 1990 Journal of Political Economy article, and points out the emergence of phenomena like multiple equilibria, hysteresis and low growth traps.
In this paper, we investigate the impact of government's stabilization policy on the dynamic behavior of the economic system in an analytical framework of a Keynes-Goodwin model of the growth cycle. In particular, we study the effects of the policy lag on macroeconomic stability analytically and numerically. It is shown that the increase of the policy lag contributes to destabilize the system, and cyclical behavior and chaotic motion emerge in some ranges of the parameter values. (c) 2006 Elsevier B.V. All rights reserved.
This article is centred around the notions of shareholder value orientation and financialisation. Shareholder value orientation
is reflected by a high dividend payout ratio applied by firms and the reluctance of firms to finance physical investment via
new equity issues. Financialisation is the more general development towards an increased importance of the financial sector
of the economy relative to the non-financial sector. In this article, a synthetic, stock-flow consistent model is developed
that attempts to encompass some important recent works on the effects of financialisation. This includes contributions from
the fields of mainstream information economics and post-Keynesian economics. We conduct simulations reflecting increased shareholder
value orientation, and show that the results are consistent with important stylised facts.
This paper modifies the textbook income-expenditure model to properly account for imports. This modification causes government spending to have an even larger relative impact compared to tax cuts than conventionally thought. It also shows that increased government spending can have a smaller impact on the trade deficit than tax cuts despite spending having a larger multiplier effect on income. Consequently, spending may be doubly advantaged over tax cuts as a means of reflating economic activity. Last, the paper shows that consumption tax cuts can be an antistimulus that reduces aggregate demand and output.
Many widely used economic models implicitly assume that income shares should be identical across time and space. Although time-series data from industrial countries appear consistent with this notion, cross-section data generally appear to contradict the assumption. A commonly used calculation suggests that labor shares of national income vary from about .05 to about .80 in international cross-section data. This paper suggests that the usual approach underestimates labor income in small firms. Several adjustments for calculating labor shares are identified and compared. They all yield labor shares for most countries in the range of .65.80.
The shares of capital and labour in national income vary substantially both over time and across countries. This paper shows that the factor distribution of income is an essential determinant of the personal distribution of income. We use cross-country and panel data for a group of developed and developing countries to show that a larger labour share is associated with a lower Gini coefficient of personal incomes. This effect is not only statistically significant but also economically important. An increase in the labour share in Mexico to that observed in the US would reduce the Gini coefficient of the former by between two and five points.
Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core and headline CPI in the United States. Linear trends in the CPI difference allow accurate prediction of the prices at a five to ten-year horizon.
This paper takes up the question of whether government debt worsens the distribution of income as tax revenues from workers
are used to pay for the interest on the debt held by the rich. In so doing, we develop a post-Keynesian model in which growth
is determined by aggregate demand rather than by die supply of resources and income is distributed between workers who earn
wages and capitalists who receive profit and interest income. Our analysis highlights the possible expansionary effect of
a rise in government debt which may raise the income of the workers, and it shows that its precise effect on income inequality
depends on die circumstances under which government debt rises.
Using the Keynesian theory of effective demand, this paper demonstrates how particular models, such as that of "cooperative capitalism" enunciated by the left Keynesian social democrats, the Marxian model of "profit squeeze" emphasizing distributive conflict, and even the conservative model relying on "supply side" stimulus, fit in as particular variants of a more general theoretical scheme through a reconstruction of the familiar IS schedule. The argument is weaved around the theme of the relations between unemployment and real wage in the context of both a closed and an open economy to explain the common macroeconomic basis of contesting ideologies. Copyright 1990 by Oxford University Press.
Real wage growth restraint is generally regarded as a necessary condition for sustained gross domestic product growth and lower unemployment in the Organization for Economic Cooperation and Development (OECD). We use a general Keynesian growth model, allowing demand growth to be wage led or profit led, to argue that the case for real wage restraint is based on weak foundations. The model is applied to eight OECD countries (1960-2000). We find that (1) demand is wage led in France, Germany, Italy, the Netherlands, Spain, and the United Kingdom, and (2) the decline in world trade growth is the dominant cause of sluggish growth in all economies, including profit-led Japan and the United States.
Evidence from a broad panel of countries shows little overall relation between income inequality and rates of growth and investment. For growth, higher inequality tends to retard growth in poor countries and encourage growth in richer places. The Kuznets curve--whereby inequality first increases and later decreases during the process of economic development--emerges as a clear empirical regularity. However, this relation does not explain the bulk of variations in inequality across countries or over time. Copyright 2000 by Kluwer Academic Publishers
In the present paper we extend Lavoie's (Metroeconomica, 1995, vol. 46, pp. 146-177) 'Minsky-Steindl' model, building our analysis on a Kaleckian distribution and growth model which has already taken into account distribution effects of interest rate variations on the short-run equilibrium. Into this model the effects of debt and debt services are explicitly introduced and the effects of interest rate variations on the short- and the long-run equilibrium are derived. It is shown that the effects of interest rate variations on the endogenously determined equilibrium values of the model not only depend on the parameter values in the saving and investment functions but also on the interest elasticity of distribution and on initial conditions with respect to the interest rate and the debt-capital ratio. Copyright © 2007 The Author; Journal compilation © 2007 Blackwell Publishing Ltd.
What makes growth sustained?
- Berg
‘Rethinking Wage vs. Profit-led Growth Theory with Implications for Policy Analysis’,
- Palley
The Economics of Demand-Led Growth: Challenging the Supply-Side Vision of the Long Run
- R A Blecker
- M A Northampton
- Edward Elgar Carvalho
- L Rezai
Blecker, R. A. 2002. Distribution, demand, and growth in neo-Kaleckian macro models, pp.
129-52, in Setterfield, M. (ed.), The Economics of Demand-Led Growth: Challenging the Supply-Side Vision of the Long Run, Cheltenham, UK and Northampton, MA, Edward Elgar
Carvalho, L., and Rezai, A. 2016. Personal income inequality and aggregate demand, Cambridge
Journal of Economics, vol. 40, no. 2, 491-505
- C W M Naastepad
- S Storm
Naastepad, C. W. M. and Storm, S. 2006. OECD demand regimes (1960-2000), Journal of Post
Keynesian Economics, vol. 29, no. 2, 211-46
Rethinking Wage vs. Profit-led Growth Theory with Implications for Policy Analysis', Macroeconomic Policy Institute (IMK) Working Paper no
- T I Palley
Palley, T. I. 2014. 'Rethinking Wage vs. Profit-led Growth Theory with Implications for Policy
Analysis', Macroeconomic Policy Institute (IMK) Working Paper no. 141