Final presentation

Final presentation

Endogenizing productivity in the

Bhaduri-Marglin model

Bernhard Schütz

a.Univ.Prof. Dr. Martin Riese

WS 2008/09

Endogenizing productivity in the Bhaduri-Marglin model 2

Overview

• What‘s the Bhaduri-Marglin model?

Why endogenous productivity?

• Endogenous productivity in other post-

Keynesian models

• Endogenous productivity in the Bhaduri-

Marglin model

The Bhaduri-Marglin model


The Bhaduri-Marglin model I

Focus: What‘s the influence of real wage

restraint on output?

Lower real wages lead to:• Lower wage cost, which means higher profits higher

investment demand

• Lower purchasing power lower consumption demand


The Bhaduri-Marglin model II

• Starting point:Y = C + I I = S

• Investment: I = I(h,z)

• h = / Y...profit share

• z = Y / Y*...capacity utilization(…total profits, Y*...potential output)


The Bhaduri-Marglin model III

• Saving:

Y*=1 S = shz

• Profit share (h):

w...real wage rate

…labor

productivity

**Y

Y

Y

YssS

w

h 1


The Bhaduri-Marglin model IV

• Equilibrium condition: I(h,z) = shz

• Total differentiation yields:

z

Ish

szh

I

dh

dz


The Bhaduri-Marglin model V

Real wage restraint (increase in the profit share) leads to:

• A rise in z if the responsiveness of investment (to a change in

h) is strong

• A fall in z if the responsiveness of investment (to a change in h)

is weak

z

Ish

szh

I

dh

dz

Endogenous productivity other in post-Keynesian growth

models


Endogenous productivity other in post-Keynesian growth models:

• Raghavendra (2006):

• Hein (2004):

• Cassetti (2003):

• Naastepad (2006):

• Bhaduri (2006):

)(z)ˆ(Y

),ˆ( hY)ˆ,ˆ( wY

NLdt

d ˆˆˆ

Endogenous labor productivity in the Bhaduri-Marglin model


Prerequisite

Deriving with respect to w instead of h yields (no

change in meaning):

z

Ish

h

Isz

dw

dz

1

z

Ish

szh

I

dh

dz

Economies of scale


Economies of scale I

• Higher capacity utilization leads to higher

labor productivity:

• Productivity influences the profit share:

z 0dz

d

)(1

z

wh


Economies of scale II

Result:

• No change in the numerator

• Can the denominator turn negative?

dzdw

hI

szzI

sh

hI

sz

dw

dz

2

1


Economies of scale III

Keynesian stability condition must be valid:

This is equal to

,

which means that the denominator cannot turn negative for stability

reasons.

022

dz

dw

h

I

z

I

dz

dwszsh

dz

dI

dz

dS

02

dz

dw

h

Isz

z

Ish


Economies of scale IVInterpretation of the result:

• dz/dw > 0 if

• dz/dw < 0 if

• dz/dw increases in the profit-led demand regime

• dz/dw decreases in the wage-led demand regime

dz

dI

dz

dS

dz

dw

h

I

z

I

dz

dwszsh

h

Isz

dz

dw

h

Isz

z

Ish

h

Isz

dw

dz

222

11

0/ hIsz

0/ hIsz

The wage-effect


The wage-effect I

Higher real wages increase productivity by- increasing the firm‘s incentive to invest into labor productivity

raising techniques (Naastepad 2006)

- eliminating less efficient firms from the market („Webb-effect“) (Lavoie 1992)

- creating more motivated workers (efficiency wage theory)

Effect on the profit share:

wz, 0w

),(1

wz

wh


The wage-effect II

Result:

• No change in the denominator

• If < 1, the effect of real wage restraint on z is smaller

than before, because the gain in profit share is smaller

• If > 1, lower real wages cause a fall in the profit share.

This means that dz/dw > 0 in the profit-led regime

z

w

h

I

z

I

z

wszsh

h

Isz

dw

dz w

22

,11

w,

w,

Investment effect


Investment effect I

• Firms try to gain advantage over each other by increasing their level of productivity. This leads to:• new methods of production

• more technically advanced types of capital

• The effect of the presence of more technically advanced capital is a rise in the aggregate level of labor productivity. If other firms want to apply the new techniques in the production process, they have to invest in new capital.

),,( zhII 0I


Investment effect IIResult:

• Additional negative term in the denominator:

Any negative (positive) effect of real wage restraint on z will be larger because of the additional negative (positive) effect of lower (higher) demand on investment (through labor productivity)

• Additional positive term in the numerator:

Real wage restraint has an additional negative effect on investment (through its negative impact on labor productivity)

z

I

z

w

h

I

z

I

z

wszsh

w

I

h

Isz

dw

dz w

22

,11


Investment effect III

• Any effect of real wage restraint on capacity utilization will be

bigger (because the denominator is smaller)

• The possibility for real wage restraint to have a negative impact

on capacity utilization increased (because of the additional

positive term in the numerator)

z

I

z

w

h

I

z

I

z

wszsh

w

I

h

Isz

dw

dz w

22

,11

Summary


Summary I

If only the influence of z on labor productivity is

considered,

- the condition from the original BM-model holds:

dz/dw > 0 if

- changes in productivity influence the size of the effect,

increasing it in a profit-led demand regime and decreasing it

in a wage-led demand regime.

hIsz /


Summary IIIf also an effect of the real wage rate on labor productivity is considered,

- the condition from the original BM-model for dz/dw > 0

( ) remains only valid if < 1

- the impact of real wage restraint on output is zero if = 1

- the impact of real wage restraint on output is generally smaller if

< 1, because losses in productivity affect the profit share negatively

- real wage restraint leads to a loss in z in a profit-led demand regime if > 1 because of the large drop in productivity

hIsz / w,

w,

w,

w,


Summary III

If a positive impact of labor productivity on investment is taken

into account,

- any effect of real wage restraint on capacity utilization will be bigger

in general

- a negative impact of real wage restraint on capacity utilization

becomes more likely


Conclusion

Real wage restraint and productivity influence the

economy in many more ways than recognized in the

Bhaduri-Marglin model.

That’s the reason why, by ignoring labor productivity

in their analysis, Bhaduri and Marglin were too

simplistic.

Thank you for your attention!

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