A wage-led or profit-ledge demand regime: the case of Jordan (1990-20220)

Abstract

Purpose- Recently, the Jordanian economy has been finding it increasingly challenging to create sufficient job opportunities and absorb the new labor market entrants and hence, reduce unemployment. The economy must achieve healthy and persistent economic growth. Within this context, this paper looks at the relationship between income distribution of labor and capital on economic growth. In other words, the overall purpose of this paper is to examine whether the Jordanian economy is profit-led or wage-led. Methodology- To examine the functional distribution of income in Jordan, the paper uses the period 1990-2020 (annual data) and time series techniques including stationarity test, lag length selection criteria, and augmented autoregressive distributed lag (ARDL) bounds test for cointegration. Findings- Based on the period 1990 –2020, the results indicate that the demand regime in Jordan is wage-led and not profit-led. In more specific terms, a one-percentage-point increase in the profit share decreases output by 0.08 percent. Conclusion- To rise-up to the growth and unemployment challenges that face the Jordanian economy, the government would be well-advised if it ensures that nominal wages increase in line with inflation as well as productivity. In addition, the government should adopt a wage-led strategy that rests on labour market policies whose aims are to pre-distribute income (such as minimum wage and better education and health policies) and redistribute income through progressive taxes.