Profit-led Demand Regimes Research Articles

Inequality, Consumption Emulation, and Growth

We develop a short-run neo-Kaleckian model to investigate the interplay of the functional and personal distribution of income and their impact on growth. Personal distribution becomes relevant in light of the institutionalist hypothesis of consumption emulation, which makes aggregate saving dependent on the concentration of wages and profits. A more equal distribution of wages and/or profits increases aggregate demand and the rate of capacity utilization. But the wage- or profit-led demand regime crucially depends on the difference between the propensity to save out of profits and that out of wages, as well as on the impact of changes in the profit and wage shares on the concentration of personal incomes. Preliminary evidence on Italy over the period 1980s–2010s highlights that demand regimes might be a relatively short-term and cyclical characteristic of that economy, with changes in the demand regime partly explained by changes in personal income distribution. JEL Classification: E11, D31, B52

A note on ‘Wage-led versus profit-led demand regimes: the long and the short of it’

The aggregative and structural approaches are the main approaches used to investigate the US demand regime. They have reported mixed findings whereby the former tends to find profit-led results and the latter tends to find wage-led results. Blecker (2016) suggests that those conflicting findings can be explained, at least in part, by the different time dimensions captured by the two approaches. That is because the US economy tends to be profit-led in the short run and wage-led in the long run. This note discusses and extends Blecker's analysis. An alternative interpretation of the findings of studies using the structural approach is offered, suggesting that their conclusions rest on their handling of the short run. Specifically, the structural approach fails to find cointegration relations among integrated variables in most equations. That absence means it fails to pick up the stronger effect of the wage share on consumption in the long run, which is a key mechanism explaining different regimes across time horizons. The note concludes by briefly discussing other possible explanations for the conflicting results reported in the empirical literature.

The Macroeconomic Effects of Financialization and the Wage Gap between Blue and White Collar Workers

In a post-Keynesian growth model with two types of workers, an attempt is taken to understand changes in financial behaviour and income distribution and their macroeconomic causes and consequences. For a relatively strong speed of adjustment in the financial market and a relatively weak reserve army effect, a stable steady state is achieved in the wage-led demand regime. An endogenous and perpetual business cycles may emerge in both the regimes. While in some scenario, a contraction in the wage gap between white and blue-collar employments can make the steady state unstable, in a profit-led demand regime, a rise in the wage gap can destabilize the economy. A more regulated financial market is desirable for ensuring the economy’s stability in a weak wage-led or a weak profit-led demand regime. A more regulated labour market and a rise in unionization are desirable as these can mitigate income inequality.

Government expenditure and economic growth: a post-Keynesian analysis

ABSTRACT In a post-Keynesian growth model with positive saving propensity out of wages, this paper analyses the implication of different kinds of government expenditures on aggregate demand and economic growth. We distinguish between government expenditure on consumption and investment. The basic idea is that certain kinds of government investment expenditure influences labour productivity. In a formal model, we incorporate this idea by assuming labour productivity as an increasing function of government investment expenditure. When the economy is in a profit-led demand regime, under the balanced budget assumption, we show that a shift in government expenditure from consumption to investment leads to an unambiguous rise in both aggregate demand and economic growth. However, the result is ambiguous in the wage-led demand regime. Once the balanced budget assumption is dropped, while in a wage-led demand regime a rise in government investment expenditure may decrease aggregate demand and growth, it unambiguously raises both aggregate demand and growth in a profit-led demand regime. On the other hand, in the absence of a balanced budget assumption, a rise in government consumption expenditure has a positive effect in both regimes. We also show that allowing the government to run a deficit and incur debt does not necessarily lead to the public debt rising without bounds.

Cyclical dynamics in a Kaleckian model with demand and distribution regimes and endogenous natural output

AbstractWe analyse the interaction of demand and income distribution in a dynamic Kaleckian model with endogenous natural output. Endogenous changes of the natural output level to changes in the demand‐determined actual output level have featured prominently in discussions of hysteresis after the crisis of 2008. We consider wage‐led and profit‐led demand (PLD) regimes and goods market‐led and labour market‐led income distribution regimes. The stability of the steady state is related to the endogeneity of natural output level in certain regimes. Limit cycles arise when the strong flexibility of prices or wages to the output gap is combined with moderate natural output hysteresis. A Kaleckian model with a wage‐led demand regime and anticyclical profit share is less unstable and pseudo‐Goodwin cycles can arise in the PLD regime with a procyclical profit share.

On wage- and profit-led demand regimes: learning from the evidence

This paper contributes to the empirical research around the “wage-led” or “profit-led” demand regimes. It first reviews how Kalecki, and then Steindl, approached the relationship between economic growth and income distribution. Then, empirical analysis carried out under the probabilistic approach to econometric modeling shows statistical evidence, estimated through cointegration analysis, that in the long run, in three very open economies—Mexico, France, and Korea—the wage share is positively associated with demand and output. It finally discusses the macroeconomic dilemma that almost all countries have to face, i.e., a positive effect of a high-wage policy on demand and employment may diverge from a negative effect on output compatible with external equilibrium.

The origins and evolution of the debate on wage-led and profit-led regimes*

While Kaleckian authors tend to find that economies are in a wage-led demand regime, Goodwinian authors tend to find that economies are in a profit-led demand regime. This paper avoids econometric technicalities and provides instead a historical perspective, going back to the empirical study of Boddy and Crotty and that of Weisskopf, as well as to the debates that arose in the 1980s between but also within the two main strands of heterodox macroeconomics: the Marxians and the post-Keynesians. This hopefully will help to shed some light on the more recent controversy over the existence of profit-led or wage-led demand regimes. A noteworthy feature of the paper is the emphasis on the existence of overhead labour costs and hence the distinction between managers and ordinary workers. These are likely to bias empirical measurements of demand regimes towards the profit-led regime at high-frequency data; they may also give rise to paradoxical results; and they justify the claim that an increase in the wage share of ordinary workers is likely to have a positive effect on aggregate demand even if economies are profit-led.

Longer-run distributive cycles: wavelet decompositions for the US, 1948–2011

This paper presents an analysis of the comovement of the income–capital ratio, output gap, and employment rate vis-A -vis the functional distribution of income. We decompose time series into wavelets of varying periodicity. Cycles at all periodicities in all three variables vis-A -vis wage share show a counter-clockwise (‘Goodwin’) pattern. The well-known regular cycles appear at business cycle frequency. Furthermore, a roughly 30-year cycle exists before 1980. Post-1980, no clear medium-run cyclical picture emerges. This finding is complemented by wavelet covariance analysis, which suggests that covariance of longer period cycles is negative before 1980, but positive thereafter. Crucially, trajectories of trends across the entire postwar period raise the possibility of one ‘long’ 60-year Goodwin cycle in all three variables vis-A -vis the wage share, which would suggest that sustained growth after c.2000 required much broader real wage increases relative to labor productivity. We conduct non-parametric Granger tests, which indicate that systematic interaction at all periodicities exist. We discuss our findings in relation to the debate on wage-led and profit-led demand regimes.

Wage-led versus profit-led demand regimes: the long and the short of it

Empirical studies have found mixed results regarding whether various countries have wage-led or profit-led demand regimes based on a variety of econometric methodologies. However, most of the previous literature has paid too little attention to the time dimension of this distinction. This paper argues that demand is more likely to be profit led (or, at least, more weakly wage led) in the short run and more likely to be wage led (or more strongly wage led) in the long run, because the positive effects of higher profits (lower labor costs) on investment and net exports are likely to be strongest in the short run, while the positive effects of a higher wage share on consumption are if anything likely to be stronger in the long run. In fact, most of the studies that have found profit-led results (especially for the US) have used methodologies that (either intentionally or unintentionally) emphasize short-run cyclical relationships. An examination of correlations in the raw data for the US economy over different time horizons illustrates the plausibility of output and growth being profit led in the short run and wage led in the long run.

Pseudo-Goodwin cycles in a Minsky model

Goodwin cycles result from the dynamic interaction between a profit-led demand regime and a reserve army effect in income distribution. The paper proposes the concept of a pseudo-Goodwin cycle. We define this as a counter-clockwise movement in output and wage share space which is not generated by the usual Goodwin mechanism. In particular, it does not depend on a profit-led demand regime. To illustrate this, a simple Minsky-type model is extended by a reserve army distribution adjustment. In this model the cycle is generated by the interaction of financial fragility and demand. The wage share rises at higher levels of output but this generates no feedback so that, by design, demand does not react to changes in income distribution. But the model does exhibit a pseudo-Goodwin cycle in the output-wage share space. This holds true even if we introduce a wage-led demand regime. This demonstrates that the existence of a counter-clockwise movement of output and the wage share cannot be regarded as proof of the existence of a Goodwin cycle and a profit-led demand regime.

Inflation, growth, and distribution: The Brazilian economy after the post war

Following Marglin and Bhaduri (1990), the purpose of this paper is to investigate empirically the interaction between income distribution and growth of aggregate demand during the 1951–89 period in Brazil. Applying Hein and Vogel’s (2008) methodology we conclude that the Brazilian economy showed a profit-led demand regime. In a context of high inflation, high concentration of markets, and wage control, retained profits were the main source to finance new capital. In this sense, we found a large sensitivity of investment relative to the wage share, a result that is compatible with a consumption pattern based on high income, which supported the growth trend with low wages observed during the period.

The macroeconomic effects of the wage gap between regular and non-regular employment and of minimum wages

We develop a disequilibrium macrodynamic model in which two types of labor (regular and non-regular employment) are incorporated. We analyze how the expansion of the wage gap between regular and non-regular employment affects the economy. If the steady state equilibrium exhibits the wage-led demand regime, an increase in the wage gap does not affect the stability of equilibrium. In this case, the size of the reserve army effect affects the stability of the equilibrium. If the reserve army effect is strong, the steady state equilibrium is unstable. On the other hand, if the steady state equilibrium exhibits the profit-led demand regime, an increase in the wage gap destabilizes the equilibrium. It is possible that depending on conditions, an increase in the wage gap produces endogenous and perpetual business cycles. The introduction of the minimum wage is desirable in that it mitigates business cycle fluctuations. However, the introduction of an inappropriate minimum wage policy leads to a real wage and an employment rate that are lower than the steady state values.

Wage-led growth: theory, evidence, policy

The paper provides an overview of the concept of wage-led growth, both as an analytical concept and as an economic policy strategy. At the core of our analysis is the distinction between wage-led and profit-led demand regimes. The Kaleckian tradition in macroeconomics asserts that a higher wage share will have expansionary effects. generalize the model by allowing for classical mechanisms. The paper presents a two-country short run model to clarify the key concepts surrounding a wage-led vs a profit-led demand regime. It distinguishes carefully between partial and total effects and it analyses demand regimes with respect to national as well as international changes in the wage share. We also review the empirical literature. Our reading is that the available evidence indicates that demand in most economies is domestically wage-led. Changes in functional income distribution also have supply-side effects. Available evidence suggests that higher wage growth induces higher productivity growth. Neoliberalism resulted in an increase in inequality and a decline in the wage share, but growth has nowhere been based on the profit-led growth process. Rather neoliberalism has given rise to either debt-led or export-led growth regimes. The paper concludes by outlining a wage-led growth strategy and by discussing its limitations.

Goodwin or Kalecki in Demand? Functional Income Distribution and Aggregate Demand in the Short Run

In a seminal paper on Marxian business cycle theory, Goodwin (1967) presented a model which assumed that a higher wage share leads to lower investment and thus a general economic slowdown. In contrast Kalecki (1971) was arguing that a higher wage share would have an expansionary effect because the consumption propensity out of wage income is higher than that out of profit income. Based on a general model that allows for wage-led as well as profit-led demand regimes, this paper estimates the effects of a change in the wage share on aggregate private domestic demand with quarterly data for 12 OECD countries. JEL classification: E11, E12, E20, E22, E25

Monetary policy and macroeconomic stability under alternative demand regimes

In this paper we analyse the interaction of macroeconomic activity and the dynamics of real wages from a theoretical perspective. By means of a system-dynamic approach we investigate the economic viability of wage- and profit-led demand regimes by analysing not only the effect of real wages on output, but also the feedback mechanisms of macroeconomic activity on the real wages. Furthermore, in this context, we focus on the role of monetary policy as a macroeconomic stabilisation mechanism in the two mentioned demand regimes.