Abstract
Abstract This paper investigates non-cyclical, short-run relationships between income distribution and the components of aggregate demand in the US from 1963–2016. Previous studies using this ‘structural’ methodology have typically found that demand is wage-led in most large, advanced economies. However, these studies have been criticised for treating total output and the wage share as exogenous, potentially leading to simultaneity bias. This paper corrects for such possible bias as well as common shocks to the equations by using systems GMM. Surprisingly, these estimates imply that private-sector aggregate demand is more, rather than less, wage-led (or in some cases, less profit-led) compared with OLS estimates of identically specified models. This paper is also the first to provide separate estimates of non-residential and residential investment functions and to distinguish the effects of shocks to different underlying determinants of the wage share (unit labour costs and firms’ monopoly power), finding that these differ qualitatively.
Highlights
In response to growing inequality, policy makers in many countries today are debating the use of redistributive policies and their likely macroeconomic consequences
This is the first empirical paper that uses the approach to modeling an endogenous wage share and how it is linked to the real exchange rate (RER) and net exports originally developed by Blecker (1989, 2002) in a structural model of demand and distribution
This paper is the first to apply systems generalized method of moments (GMM) methods to estimating structural models of demand and distribution in order to control for simultaneity bias and the systemic dimension of multiequation models
Summary
In response to growing inequality, policy makers in many countries today are debating the use of redistributive policies and their likely macroeconomic consequences. The existing empirical literature on the relationship between the functional distribution of income and aggregate demand in the short run is deeply divided, with results that largely align with the methodologies employed. Those who follow an aggregative approach by directly estimating relationship between the capacity utilization rate (ratio of actual to potential output) and the wage (or profit) share generally find evidence of profit-led demand and a profit-squeeze in distribution (increasing utilization raises the wage share) in the short. This paper finds no evidence that the separate estimation of the structural equations or treatment of the wage share as exogenous biases the results toward finding more strongly wage-led demand.
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