Is planet Earth as a whole likely to be wage-led?

Abstract

Open-economy considerations that create the possibility of ‘beggar-thy-neighbor’ effects offer one explanation for why the relationship between distribution, demand, and growth may be complicated in the short run. Several authors have argued recently, however, that even if demand and growth are profit-led in many individual countries, the global economy is likely to be wage-led since the planet as a whole runs balanced trade. This paper shows that this argument, while intuitively appealing, does not hold up to careful examination. Although the world economy as a whole is a closed system, it is not isomorphic to a closed economy, thanks to repercussion effects, relative price movements, and cross-country heterogeneity. Using asymmetries in consumption as a simple illustrative device I show that, in a two-country world, the effects of global redistribution depend on the nature of the constituent economies. This conclusion holds in spite of balanced trade at a planetary level, and regardless of whether one or both economies have excess capacity or whether zero-sum effects are present or not.