Wage-led growth

2 Oct, 2014 at 18:15 | Posted in Economics | 2 Comments

wagesWages 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 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 …

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. 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.

finTo 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-focusing 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).

Marc Lavoie & Engelbert Stockhammer

2 Comments

  1. You have the data, here is the employment formula
    Comment on Marc Lavoie and Engelbert Stockhammer’s ‘Wage-led growth’

    You write: “The most recent empirical studies show that the world economy overall is in a wage-led demand regime …”

    This is good news in several respects. I focus in the following on verification/falsification, i.e., on the relationship between facts and theory.

    You write: “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.”

    This debate can be quickly resolved. A positive relationship between an increasing wage rate, various demand components, and employment is exactly what the structural axiomatic employment function asserts (see 2014, p. 9, eq. (22)).

    I wrote on p. 10: “A general increase of the wage rate increases the factor cost ratio in eq. (22) and effects a higher employment. This systemic property follows in direct lineage from the axioms and the condition of product market clearing. It goes without saying that this rectified relationship between wage rate and employment is almost certainly beyond the comprehension of the marginalistic supply-demand-equilibrium mindset. There is no need, though, to discuss much about contradicting assertions because eq. (22) is testable. Therefore, an experimentum crucis that settles the matter is possible in principle. There cannot be much doubt about the outcome.”

    The outcome is what the most recent empirical studies show. These studies have not yet come to my notice, yet I am quite certain that you can improve the results by applying the structural axiomatic employment function. And, best of all, you get the underlying theory in one package with the correct profit formula.

    I am looking forward to a perfect empirical corroboration of the structural axiomatic employment function.

    Egmont Kakarot-Handtke

    References
    Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
    Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489792.

  2. One big sweep

    Additional comment on Marc Lavoie and Engelbert Stockhammer’s ‘Wage-led growth’

    Does anybody remember that the original Phillips curve showed a positive relationship between wage rate and employment? And that is was stable for a century? And that this was a very, very remarkable piece of empirical evidence?

    What happens now in real time? You say it: “The most recent empirical studies show that the world economy overall is in a wage-led demand regime …

    Could there be a connection?

    Yes. If you can corroborate the structural axiomatic employment function, then you corroborate uno actu the structural Phillips curve (2012, p. 14, eq. (33)). And that means that you corroborate the original Phillips curve. And that in turn means that you can explain stagflation, the big issue that brought Keynesianism down. And that finally means that the whole NAIRU issue evaporates into the blue sky.

    Egmont Kakarot-Handtke

    References
    Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous
    Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL
    http://ssrn.com/abstract=2130421.


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