wage-led growth: concept, theories and policies marc lavoie in collaboration with engelbert...
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Wage-led Growth: Concept, Theories
and Policies
Marc Lavoie
In collaboration with
Engelbert Stockhammer
Preliminary remarks
• The wage share has been falling in several countries over the last decades.
• There has been a polarization of incomes, even within wage and salary income.
• Average wages and average labour compensation have not kept up with productivity increases.
• Growth processes seem to have become more unbalanced.• Export-led growth and finance-led growth regimes do not seem
to be sustainable or stable, leading to global imbalances.
• A new wage-led growth strategy is needed.
Jornada de Economia Politica, UNQ, Argentina, 2012
Wage-led economic strategy
• Tied to underconsumption theories (Malthus, Sismondi, Hobson)
• Tied to the Marxist profit realization problem (Kalecki, Baran and Sweezy, Steindl, Bhaduri)
• Linked with neo-Kaleckian models (Rowthorn, Taylor, Dutt) that emphasize demand and paradoxes
• Linked with the Kaldorian tradition, which emphasizes the fact that, within limits, demand can create its own supply
Jornada de Economia Politica, UNQ, Argentina, 2012
ILO project: New perspectives on wages and economic growth: potentials of wage-led growth
• 1. Conceptual clarification (Lavoie, Stockhammer)• 2. Why has the wage share been falling?
(Stockhammer)• 3. A mapping of wage-led and profit-led demand
(Özlem Onaran, Giorgos Galanis)• 4. A mapping of wage-led and profit-led supply
(Storm, Naastepad)• 5. The impact of income polarization (Van Treeck,
Sturn)• 6. The impact of financialization (Hein, Mundt)
Jornada de Economia Politica, UNQ, Argentina, 2012
Outline
• A conceptual framework: policies versus regimes• Demand regimes• Productivity regimes
Jornada de Economia Politica, UNQ, Argentina, 2012
The crucial distinction
• One has to distinguish between • (1) the policies that are being pursued in a country to
promote a certain kind of growth regime;• (2) and the economic growth regime that this country
is actually into, and hence how the economy will react to the policies being put forward.
• (1) Distributional policies are either pro-labour or pro-capital;
• (2) Actual growth regimes are wage-led or profit-led.
Jornada de Economia Politica, UNQ, Argentina, 2012
Pro-labour and pro-capital distributional policies
Jornada de Economia Politica, UNQ, Argentina, 2012
Distributional policies Other factors
Pro-capital Pro-labour
Policies ‘Labour market
flexibility’
Abolish minimum
wages
Weaken collective
bargaining, rights
to strike
Impose wage
moderation
‘Welfare state’
Increase minimum
wages
Strengthen
collective
bargaining
Changes in
technology
Globalisation
Financialization
Fiscal policies
Monetary
policies
Results Weak wage growth
Wage share ↓
Increased wage
dispersion
Rising real wages
Stable (or ↑) wage
share
Decreased wage
dispersion
Definition of profit-led and wage-led economic regimes
Jornada de Economia Politica, UNQ, Argentina, 2012
Overall impact on the
economy
Favourabl
e
Unfavoura
ble
Income
distribution
change
imposed on
society
An
increase
in the
profit
share
Profit-led
regime
Wage-led
regime
An
increase
in the
wage
share
Wage-led
regime
Profit-led
regime
Viability of growth regimes
Jornada de Economia Politica, UNQ, Argentina, 2012
Distributional policies
Pro-
capital
Pro-
labour
Economic
regime
Profit-led Profit-led
growth
process
Stagnation
or
unstable
growth
Wage-led Stagnation
or
unstable
growth
Wage-led
growth
process
Actual growth strategies
Jornada de Economia Politica, UNQ, Argentina, 2012
Distributional policies and strategies
Pro-capital Pro-labour
Economi
c regime
Profit-led ‘Trickle-down
Neoliberalism’ – Supply-
side policies will
generate aggregate
demand
‘Doomed
social
reforms’
TINA
Wage-led ‘Neoliberalism in
practice’ – Unstable and
has to rely on exogenous
growth drivers (credit-led
growth, export-led
growth)
Postwar
social
Keynesianis
m
Golden age
qqfull capacity
UC MC
MC
p
qnormal
pProfit per
unit
Preliminary micro issue: no profit-maximizing constraint; sales constraint instead
Jornada de Economia Politica, UNQ, Argentina, 2012
Demand regimes, Y=C+I+NX+G
• An increase in the Wage Share leads to WS ↑• Domestic demand effects
– Effect on consumption (sp > sw ) C ↑
– Effect on investment I (↑) ↓
• Effect on net exports NX ↓
Total demand effect Y ↓↑
• Various studies indicate that the propensity to save out of profits is about 0.40 above the propensity to save out of wages
Jornada de Economia Politica, UNQ, Argentina, 2012
qqma
I
S0
S00 = I0
I, S
q0
Ia
qm
S1
E
Effect of an increase in the wage share in the canonical Kaleckian model (multiplier and accelerator)
Jornada de Economia Politica, UNQ, Argentina, 2012
S01F
G
qqma
I0
S0
I0
I, S
q0
Ia
qm
S1
I2
I1
Effects of an increase in the wage share in the post-Kaleckian model (profitability effect)
Effects of an increase in the wage share and demand regimes
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Effect on total demand (or the
rate of capacity utilization)
Positive Negative
Effect on
investment
(or the rate of
accumulation)
Positive Wage-led demand
and
wage-led
investment
Negative Wage-led demand
and profit-led
investment
Profit-led
demand and
profit-led
investment
A note on the empirical work assessing demand regimes
• It should be pointed out that usually in empirical studies of the demand regimes, the accelerator effect is not taken into account.
• The researcher only looks at the short-run multiplier and profitability effects.
• This means that, by construction, as long as we suppose that the profitability effect is negative or nil, an increase in the wage share will have a negative effect on the investment component of aggregate demand.
• Thus, in those studies, by construction, we cannot have a wage-led investment demand.
• As to the effect on net exports, these depend on unit labor costs and hence will normally react negatively to a higher wage share.
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Effects of an increase in the wage share and domestic and total demand regimes
Jornada de Economia Politica, UNQ, Argentina, 2012
Effect on total aggregate demand , including net exportsPositive Negative
Effect on
domestic
aggregate
demand
(investment
and
consumption
only)
Positive Wage-led domestic demand regime and wage-led total demand regime
Wage-led domestic demand regime and profit-led total demand regime
Negative Profit-led domestic demand regime and profit-led total demand regime
Economic structure: wage-led and profit-led demand regimes
Jornada de Economia Politica, UNQ, Argentina, 2012
Demand regime
Profit-led Wage-led
Econom
ic
structur
e
Small differentials in
propensities to consume
Propensity out of
wages is much higher
than the propensity
out of profits
Investment is highly sensitive to
profitability and accelerator
parameter is low
Investment is not
sensitive to
profitability and
accelerator
parameter is high
Very open economy with high
net export price elasticity
Relatively closed
economy with low net
export price elasticity
Past empirical results on demand regimes
Jornada de Economia Politica, UNQ, Argentina, 2012
Domestic Demand Total Demand
wage-led Profit-
led
wage-led Profit-led
Euro
area
SOE09, OG12 SOE09, OG12
Germany BB95, NS07,
HV08, SHG11,
SS11, OG12
NS07, HV08,
SHG11, OG12
BB95
France BB95, NS07,
ES07, HV08,
SS11, OG12
(SO04), NS07,
HV08, OG12
BB95, SE07
NL NS07, SS11 HV08 NS07 HV08
Austria SE08, HV08,
SS11
SE08,
HV08
UK BB95, NS07,
HV08 OG12
SS11 BB95, NS07,
HV08, OG12
Japan BB95, OG12 NS07 OG12 BB95,
NS07
USA BB95, HV08,
OSG12, (SS11),
OG12
NS07 BB95, HV08,
OSG12, OG12
(SO04),
NS07,
BFT06
A summary of these empirical results
• Most countries seem to be on a wage-led domestic demand regime.
• Some of these countries turn to a profit-led total demand regime when international trade is taken into account.
• Most studies conclude that the USA are in a wage-led domestic demand regime;– and the latest studies even conclude that the USA
are in a wage-led total demand regime.
Jornada de Economia Politica, UNQ, Argentina, 2012
New empirical results; Onaran (2012) on most G20 countries (80% of world GDP)
• All countries have wage-led domestic demand.• Most developed countries have wage-led total
demand, including the overall eurozone, except staple-led countries Canada and Australia.
• Large developing countries (Argentina, Mexico, China, India, South Africa) have profit-led total demand, except Turkey and Korea.
• In Argentina, a 1% point increase in the wage share leads to an increase of 0.20 % increase in domestic demand but a 0.07% decrease in total demand (GDP).
Jornada de Economia Politica, UNQ, Argentina, 2012
An error of composition
• While a country may be under a profit-led demand regime when looking at the total effect of an increase in the wage share, a simultaneous increase in the wage share of all countries may still have a positive effect on the aggregate demand of a profit-led country if its domestic demand is wage-led.
• Onaran (2012) performs this experiment. She finds that most countries or regions, including Argentina, benefit from a simultaneous increase in the wage share, with the exception of Australia and China.
• She also finds that a 1% point increase in the wage share of all countries leads to a 0.36% increase in world GDP.
• This means that some individual countries can successfully pursue beggar-thy-neighbour policies via wage moderation, but this does not constitute a viable strategy for demand on a global scale.
Jornada de Economia Politica, UNQ, Argentina, 2012
Economic structure: wage-led and profit-led productivity regimes
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Direct or Partial Productivity regime
Economic
structure
Profit
led
Wage restraint leads to productivity-
enhancing investment
Higher real wage growth leads to slower
productivity growth
Wage
led
Wage growth has strong positive effects on
labour effort and on productivity–
enhancing investments, in an attempt to to
recover profitability
Higher real wage growth leads to faster
productivity growth (efficiency wage
hypothesis, Webb effect)
Interaction between productivity and demand
• There is a lot of empirical evidence showing that faster overall growth, and faster growth in manufacturing, leads to faster productivity growth.
• This is the so-called Kaldor-Verdoorn effect.• Thus, an increase in real wages or the wage share, besides its
direct effect on productivity, will have an additional indirect effect on productivity, through the impact of the wage share on aggregate demand, and hence, through the Kaldor-Verdoorn effect, on productivity growth.
• The strenght of the demand regime will also be affected by the feedback effects of the productivity regime
Jornada de Economia Politica, UNQ, Argentina, 2012
Productivity growth
pw
Profit-led Productivity
x0
Output growth
p0pp
Kaldor-Verdoorn
relationship
E
Direct impact on productivity growth of an increase in wage share or in growth rate of real wages
Wage-ledproductivity
Combining the productivity and the demand regimes
• x = a0 + a1(w – p) the demand equation
• p = b0 + b1.x + b2.w the productivity equation
• dx/dw = a1(1 - b2) /(1 + a1b1)
• dp/dw = (b2 + a1b1) /(1 + a1b1)
• With the combination of a wage-led demand regime and a wage-led productivity regime (all coefficients positive), the positive effects of increases in real wages will be enhanced for productivity, but diminished for demand
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Productivity growthpp
x0
Output growth
p0 pt
Kaldor-Verdoorn
relationship
Direct and indirect impact of growth rate of real wages with wage-led regimes
Wage-leddemand
xd
xt
D
P
DP
The impact of an increase in real wages combining the productivity and the demand regimes
• x = a0 + a1(w – p) the demand equation
• p = b0 + b1.x + b2.w the productivity equation
• dx/dw = a1(1 - b2) /(1 + a1b1) = .19
• dp/dw = (b2 + a1b1) /(1 + a1b1) = .35
• With a1 = b1 = b2 = 0.30• And hence the change in the growth rate of
employment is:
• dx/dw - dp/dw = .19 - .35 = -.16 !!!!!• The impact on employment growth is negative!
Jornada de Economia Politica, UNQ, Argentina, 2012
A case of ommitted variable?
• Perhaps there is an omitted variable. In the demand equation, instead of:
• x = a0 + a1(w – p) • perhaps we should have:
• x = a0 + a1(w – p) + a2.p
• meaning that high productivity growth (technical progress) induces faster capital accumulation and hence faster output growth.
• In this case, the negative impact on employment would be dampened.
Jornada de Economia Politica, UNQ, Argentina, 2012
Conclusion: The real world is not so simple
• Several countries wish to pursue an export-led policy, restraining wages to gain a competitive advantage.
• But planet earth is a closed economy. All countries cannot be net exporters.
• Thus what really counts are the effects of an increase in the wage share on domestic aggregate demand.
• Empirical studies show that most countries are in a wage-led domestic demand regime.
• In such countries, rising real wages will generate high rates of productivity growth.
• Thus, it is possible that a wage-led growth strategy might slow down employment growth (technological unemployment).
• This strategy requires other expansionary policies.
Jornada de Economia Politica, UNQ, Argentina, 2012