Neo-Kaleckian growth with regime endogeneity

26 Nov, 2014 at 12:56 | Posted in Economics | Comments Off on Neo-Kaleckian growth with regime endogeneity

wages_graphic
The distinction between wage and profit-led growth is a major feature of neo-Kaleckian
growth theory. The essence of the distinction is that in a wage-led economy an increase
in the wage share (i.e. a decrease in the profit share) increases economic activity and
growth, whereas in a profit-led economy it has the reverse effects. This distinction has
important implications for policy, especially in the current environment of stagnation and high unemployment. If economies are wage-led, it suggests policy that increases the
wage share is a powerful means of raising growth and lowering unemployment. The
converse holds for economies that are profit-led …

These policy implications have triggered an extensive econometric literature that
aims to identify whether economies and economic regions are wage or profit-led. The
implicit fundamental assumption within that empirical literature is an economy’s or an
economic region’s character (i.e. whether it is wage or profit-led) is exogenously
determined by deep primitive parameters. The current paper questions that assumption
and explores the foundations of what determines whether an economy is wage or profitled …

The theoretical analysis gives rise to a Post-Keynesian analogue of the Lucas critique (Lucas, 1976). Lucas argued that the estimated econometric impact of policy was endogenous and depended on agents’ expectations of policy. In like vein, the current paper shows that whether an economy is wage or profit-led will depend on existing policies. Consequently, it is not possible to classify an economy as being intrinsically wage or profit-led. Instead, the econometrically identified character of the economy is contingent on policy and may change with changes in policy.

At the policy level, the paper shows that the growth–inequality trade-off posed by profit-led economies can be finessed by changing the distribution of the wage share. Consequently, it may be possible to have faster growth and less inequality in economies that appear profit-led. Even more significantly, if the wage distribution is changed sufficiently, the economy can flip from being profit-led to being wage-led.

Thomas Palley

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