The Limits to Wage‐Led Growth in A Low‐Income Economy

Neo‐Kaleckian literature has actively debated whether growth is wage‐ or profit‐led in capitalist economies. However, existing studies tend to ignore the non‐tradable sector and heterogeneity within the tradable sector. This article shows that incorporating these features renders wage‐led growth in an open developing economy unfeasible in the traditional (Kaleckian) sense of the term. This result—which follows even if one sets aside the competitiveness considerations generally seen as impeding such growth—occurs due to the presence of a homogeneous goods‐producing tradable sector that sets the ceiling to steady‐state growth. A corollary, in light of findings from the ‘new new trade theory’ literature, is that increasing South‐South trade may tend to narrow room for wage‐led growth regardless of the other desirable effects of higher wages.     

Redistribution in a Neo‐Kaleckian Two‐country Model

We investigate the interaction between demand‐driven growth and income distribution in open economies, by combining expenditure‐switching and demand spillover effects in a neo‐Kaleckian two country model. First, we specify elasticities of wage share and real exchange rate to the money wage relative to labor productivity, in order to precisely describe the distributive pass‐through from money wages to the labor share and the real exchange rate. Second, we analyze the demand effects of an increase in the money wage for given labor productivity (a redistribution towards labor) in both Home and Foreign country, as well as globally. We derive closed form results for two identical countries. These results indicate that redistribution towards labor at Home: (i) always increases growth globally if Home is wage‐led, but can lead to lower growth at Home relative to Foreign; and (ii) will always imply lower growth at Home relative to Foreign if Home is profit‐led, but can still be growth‐enhancing at Home. Thus, to the extent that countries are concerned with their relative economic performance, a fallacy of composition can emerge. Numerical simulations suggest that these fallacies could indeed occur. As a consequence, ‘returns to coordination’ over international labor policies might be substantial.     

A Sraffian (no) trade‐off between autonomous demand and transfer payments

This paper explores the matrix demand multiplier in Sraffian frameworks and shows that it involves an autonomous demand‐transfer payments curve, which exhibits formal similarities with the well‐known consumption (wage)‐growth (profit) curve in steady‐state capital and growth theory.     

Conspicuous Consumption,Inequality and Debt: The Nature of Consumption‐driven Profit‐led Regimes

This paper extends the theoretical concept of wage‐led and profit‐led demand regimes by incorporating relative consumption concerns. Specifically, it integrates the Veblenian concept of conspicuous consumption into the Bhaduri–Marglin model by assuming that relative consumption concerns matter primarily within the working class. If in such a framework the profit share increases and the corresponding decrease in workers' income is distributed unevenly, efforts to ‘keep up with the Joneses’ may increase consumption and, hence, lead to a consumption‐driven profit‐led regime.     

MODELS OF COMPETITION BETWEEN FIRMS: ENDOGENOUS MARKET STRUCTURE IN THE KALECKIAN MODEL

The purpose of this paper is to incorporate free entry into the Kaleckian model. To this end, we consider a model with monopolistic competition, mark‐up pricing and a free‐entry condition. Using this model, the Kaleckian model is unstable under a wage‐led growth regime, and it is stable under a profit‐led growth regime, when the interest rate is supposed to be constant. Stability under a wage‐led growth can be achieved if the interest rate is allowed to respond positively to capacity utilization. We also find that a goods market policy, but not an income distribution policy, is then effective from an economic growth perspective.     

Effort Elicitation,Wage Differentials and Income Distribution in A Wage‐Led Growth Regime

Motivated by the empirical evidence on endogenous labor effort and wage differentials, this paper explores implications for distribution and growth of firms using different strategies to elicit effort from workers. The frequency distribution of effort‐elicitation strategies across firms is governed by a replicator dynamic that generates wage differential as a long‐run equilibrium. Although firms willing to elicit more effort have to compensate workers with a higher wage rate, a larger proportion of firms adopting such strategy will not necessarily produce a higher wage share and thereby a higher growth rate. The intuition is that, depending on the accompanying rise in labor productivity, the wage share may not vary positively with the proportion of firms paying higher wages.     

Balance‐of‐payments‐constrained cyclical growth with distributive class conflicts and productivity dynamics

This study builds a dynamic balance‐of‐payments‐constrained model that incorporates the endogenous determination of the economic growth rate, conflictive wage/price distribution and employment rate. The wages, commodity prices and employment rate are determined by the profit squeeze effect and labour‐saving technical change. The relative strength of these two effects generates different outcomes for the transitional dynamics and comparative statics analysis. Particularly, the model shows stability, instability and cyclical nature, the latter of which concurs with the evidence reported by previous empirical studies.     

Viability and Corridor Stability in Keynesian Supply‐Driven Growth

In this paper we reconsider and generalize a two‐dimensional growth cycle model of Skott that is based on supply‐side adjustment mechanisms and a Kaldorian theory of income distribution. This model gives rise to degenerate Hopf bifurcations if behaviour (in terms of rates of growth) is linear close to the steady state. Furthermore full capacity limits lead to viable dynamics from the global point of view if the steady state is locally attracting and to corridor stability with persistent fluctuations when it is repelling. These findings can to some extent also be obtained for a three‐dimensional growth cycle extension of the Skott model, which includes real wage dynamics as in Rose's employment cycle, now turned into economically viable dynamics through appropriate non‐linearities in the assumed adjustment processes of output and prices in the case when the steady state is locally repelling.     

INCOME DISTRIBUTION,TECHNICAL CHANGE AND THE DYNAMICS OF INTERNATIONAL ECONOMIC INTEGRATION

This paper explores the features of a dynamic multisectoral model that focuses on the relationship between income distribution, growth and international specialization. The model is explored both for the steady‐state properties and the transitory dynamics of integrated economies. Income inequality affects the patterns of growth and international specialization as the model uses non‐linear Engel curves and hence different income groups are characterized by different expenditure patterns. At the same time income distribution is also reflected in the relative wage rates of skilled to unskilled workers, i.e. the skill premium, and hence the wage structure affects comparative costs of industries which have different skill intensities. The model is applied to a situation that analyses qualitatively different economic development strategies of catching‐up economies (a ‘Latin American’ scenario and a ‘East Asian’ scenario).     

Conflicting-claims and labour market concerns in a supermultiplier SFC model

We propose to introduce inflation via conflicting-claims, an endogenous labour productivity regime à la Kaldor-Verdoorn and an explicit account for the labour market into an SFC model that combines an endogenous autonomous expenditure component with the induced investment behaviour of firms. The aim of the paper is to analyse the dynamics of real wage and productivity growth and the impacts on the long run growth trend, income shares and the employment rate of: (a) changes in the propensity to consume; (b) changes in the bargaining power of workers; and (c) changes in the labour productivity under different institutional settings.     

THE PROFIT–INVESTMENT–UNEMPLOYMENT NEXUS AND CAPACITY UTILIZATION IN A STOCK‐FLOW CONSISTENT MODEL

This paper studies under which conditions the share of profit in value‐added, financial constraints on investment and capital shortage may foster unemployment and may limit the growth of capital and/or the growth of aggregate demand, in a stock‐flow consistent model. The efficiency of demand‐side versus supply‐side economic policies (decrease of the real interest rate and/or of the real wage, increase of the leverage ceiling constraint) depends on capital shortage and credit rationing, which are not necessarily simultaneous due to the effects of investment on aggregate demand and supply.     

FACTOR SHARES,BUSINESS CYCLES AND THE DISTRIBUTIVE LOOP

This paper looks at how factor shares vary over the business cycle and how their movements fit into Kaleckian analysis. Heterodox accounts of factor‐share movements include both profit‐squeeze arguments (procyclical wage share) and underconsumption arguments (countercyclical wage share). Empirical evidence gives no decisive support for either account: factor shares may be procyclical and countercyclical at different stages of the business cycle. If factor shares vary in such a complex way, then Kaleckian models cannot have a stable distributive curve. The economy instead follows a distributive loop, with different adjustment paths during an upswing and a downswing.     

GROWTH,AUTONOMOUS DEMAND AND A JOINT‐PRODUCT TREATMENT OF FIXED CAPITAL

The aim of this paper is to shed light on the idea of demand‐led growth by exploring the relation between growth and autonomous demands in a two‐sector model that includes fixed capital with variable efficiency. The paper considers disequilibrium only in relation to quantities, with prices set at their long‐period levels. Results of computer simulations suggest that where producers' expectations of future growth allow for dispersion in past growth rates, as well future growth in autonomous demand, this may have a significant stabilizing effect on the dynamics of output and demand.     

THE WAGE–WAGE‐ . . . ‐WAGE–PROFIT RELATION IN A MULTISECTOR BARGAINING ECONOMY

The equalization of profit rates across industries subject to firm‐level bargaining over wages generates an interindustry wage structure with higher wages in capital‐intensive sectors. The familiar inverse wage–profit relation gives way to a wage–wage‐ . . . ‐wage–profit surface on which the profit rate can vary directly with the wage paid in an individual industry. Institutional changes that decrease workers' bargaining power and increase the incomes of the unemployed tend to compress the wage distribution; these changes draw political support from cross‐class coalitions of low‐wage workers and capital‐intensive firms. Some capital‐using, labor‐saving technical changes that raise capitalists' profits in current prices lower the equilibrium profit rate.     

Sraffian general equilibrium

If the Sraffa system of equations is augmented by consumption demand equations of households and investment demand equations of industries the result is a complete system of general equilibrium having a unique positive solution for the relative prices, absolute levels of industrial outputs, the rates of growth and profit, the real wage rate, and the shares of ownership of the capital stock. The model has been generalized to include the government sector and determine the tax rate and public expenditure. Constructive algorithms for the computation of the general equilibrium have been presented. Empirical evidence from cross‐country sources has been gathered in support of a central inference of the model viz. the long‐run convergence of industrial growth rates and rates of profit towards uniformity.     

Some observations on models of growth and distribution with autonomous demand growth

This paper offers some theoretical and methodological observations on a model of growth and distribution, recently developed by Franklin Serrano and others and called the Sraffian supermultiplier model, in which the growth of autonomous capitalist consumption demand and distribution are exogenously given and capacity utilization is at an exogenously given “normal” level in long‐run equilibrium. First, it provides a simple long‐run equilibrium version and dynamic formulation of the model, and compares it to other models of growth and distribution using a common framework and focusing on the effect of a change in income distribution on growth. Second, it shows that the model can be modified to examine other components of autonomous demand growth, including government spending, exports, consumption by workers, and investment and technical change, and to simultaneous multiple sources of autonomous demand growth. Finally, it comments on some methodological issues concerning the model, and on its implications for the notion of long‐run equilibrium.     

Trend and business cycles with external markets: Non‐capacity generating semi‐autonomous expenditures and effective demand

The Global Financial Crisis has underlined the importance of developments in the household sector to explaining macro patterns. Some recent papers have discussed the role of non‐capacity generating semi‐autonomous expenditures in growth theory. This literature ties together several aspects of heterodox thought: growth and distribution; the Sraffian supermultiplier; Duesenberry's relative income hypothesis; the endogenous money approach and Kalecki–Luxemburg external markets. The basic message is that non‐wage sources of effective demand, based on mortgage and consumer credit, can play a key role in inducing capacity investment and driving long‐run output growth. This article gives a broad overview of the role of financed‐induced semi‐autonomous expenditures in growth, cycles and crises, and thus criticizes some of the previous approaches that claim to mimic actual cycles while abstracting from these crucial determinants of economic activity.     

Induced Innovation,Endogenous Technical Change and Income Distribution in a Labor‐Constrained Model of Classical Growth

We present a steady state analysis of a labor‐constrained classical growth model with endogenous direction and intensity of technical change. Firms use retained profits to raise their productive capacity and to improve labor and capital productivities. Investments are planned to maximize instantaneous profits. Comparative dynamics exercises show that (1) an increase in the saving rate and in R&D subsidies raises the steady state labor share, labor productivity growth and the employment rate, and (2) a rise in workers' bargaining power reduces the employment rate while leaving productivity growth and distribution unaffected.     

Trade and Wages: Two Puzzles from Mexico

Mexico plays an important role in the developing‐country trade‐liberalisation literature because it liberalised early and extensively. Numerous papers analysed changes in Mexican wage levels and inequality after Mexico joined the GATT in 1986. This paper reviews recent papers that analyse changes in wage levels and inequality since the North American Free Trade Agreement in 1994. Two main puzzles emerge. First, wage growth rates are similar before and after NAFTA. Second, Mexican wage inequality, which received much attention after its post‐GATT rise, falls steadily after NAFTA. This paper reviews several possible explanations for these two phenomena.