Economic growth as a double-edged sword: The pollution-adjusted Kaldor-Verdoorn effect

Abstract

There is evidence that pollution concentration impacts negatively on labor productivity, which has implications for the well-know Kaldor-Verdoorn law. While the growth rate of labor productivity varies positively with the growth rate of output, the growth rate of pollution concentration also varies positively with the latter. An increase in pollution concentration leading to environmental degradation might thus offset the productivity-enhancing effect of output growth. This paper explores such a double-edged sword feature of output growth in a demand-led macrodynamic framework having pollution concentration as a further influence on the conflict over the functional distribution of income. The stability of the environment-economy system hinges on how output growth varies with the functional distribution of income. When output growth is wage-led, the balanced growth path is unstable. When output growth is profit-led, stability is possible, but the system undergoes fluctuations as it converges to the balanced growth path.