Wage-led Growth: Concept, Theories and Policies Marc Lavoie In collaboration with Engelbert Stockhammer

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


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)


Outline

• A conceptual framework: policies versus regimes• Demand regimes• Productivity regimes


A CONCEPTUAL FRAMEWORK


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.


Pro-labour and pro-capital distributional policies


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


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


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


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

DEMAND REGIMES


qqfull capacity

UC MC

MC

p

qnormal

pProfit per

unit

Preliminary micro issue: no profit-maximizing constraint; sales constraint instead


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


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)


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


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.


Effects of an increase in the wage share and domestic and total demand regimes


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


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


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.


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).


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.


SUPPLY EFFECTS:PRODUCTIVITY REGIMES


Economic structure: wage-led and profit-led productivity regimes


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


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


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!


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.


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.


Documents

Wage-led Growth: Concept, Theories and Policies Marc Lavoie In collaboration with Engelbert Stockhammer