Macroeconomic Impacts of Declining Wage Share in National Income

Abstract

The study aims to lay down a parsimonious and tractable stock-flow-consistent macroeconomic modelling approach to enhance the analysis of identification and investigation of the key underlying causes of the macroeconomic and financial instability in the context of the 2007–2008 Global Financial Crises (GFC) and COVID-19 pandemic. The model has the following key features. First, the assets and liabilities of the four major sectors, households, firms, commercial banks and government, are explicitly formalised by considering the accounting flow of the fund approach. Second, the behaviour of each sector has been derived and analysed based on accounting identities derived from the transaction flow matrix. Third, the model is calibrated and simulated by determining the values of the parameters and the exogenous variables based on the US macroeconomic data. Fourth, the most relevant simulation experiments and their results have been sufficiently analysed to produce forecasts and provide specific policy recommendations. The findings suggest that a decline in the wage share in the national income was seen to have undermined financial and macroeconomic stability in the US (and elsewhere). The results concur with the experience of current economic crises that are associated with the impact of COVID-19.