Wage-led Growth: Concept, Theories and Policies

Wage-led Growth: Concept, Theories

and Policies

Marc Lavoie* and

Engelbert Stockhammer**

Preliminary remarks

• The wage share has been falling in several countries over the last decades.

• There has been a polarization of incomes, even within wage and salary income.

• Average wages and average labour compensation have not kept up with productivity increases.

• Growth processes seem to have become more unbalanced.• Export-led growth and finance-led growth regimes do not seem

to be sustainable or stable.

RDW Conference, ILO, Geneva, 8 July 2011

New perspectives on wages and economic growth: potentials of wage-led growth

• 1. Conceptual clarification• 2. Why has the wage share been falling?• 3. A mapping of wage-led and profit-led demand• 4. A mapping of wage-led and profit-led supply• 5. The impact of income polarization• 6. The impact of financialization


DISTRIBUTION AND GROWTH. A CONCEPTUAL FRAMEWORK


The crucial distinction

• One has to distinguish between the policies that are being pursued in a country to promote a certain kind of growth regime;

• And the economic growth regime that this country is actually into, and hence how the economy will react to the policies being put forward.


Pro-labour and pro-capital distributional policies


Distributional policies Other factors

Pro-capital Pro-labour

Policies ’Labour market

flexibility’

Abolish minimum

wages

Weaken collective

bargaining

Impose wage

moderation

’Welfare state’

Increase minimum

wages

Strengthen

collective

bargaining

Changes in

technology

Globalisation

Financialization

Results Weak wage growth

Wage share ↓

Increased wage

dispersion

Rising real wages

Stable (or ↑) wage

share

Decreased wage

dispersion

Definition of profit-led and wage-led economic regimes


Overall impact on the

economy

Favourabl

e

Unfavoura

ble

Income

distribution

change

imposed on

society

An

increase

in the

profit

share

Profit-led

regime

Wage-led

regime

An

increase

in the

wage

share

Wage-led

regime

Profit-led

regime

Viability of growth regimes


Distributional policies

Pro-

capital

Pro-

labour

Economic

regime

Profit-led Profit-led

growth

process

Stagnation

or

unstable

growth

Wage-led Stagnation

or

unstable

growth

Wage-led

growth

process

Actual growth strategies


Distributional policies and strategies

Pro-capital Pro-labour

Economi

c regime

Profit-led ‘Trickle-down

Neoliberalism’ – Supply-

side policies will

generate aggregate

demand

‘Doomed

social

reforms’

TINA

Wage-led ‘Neoliberalism in

practice’ – Unstable and

has to rely on exogenous

growth drivers (credit-led

growth, export-led

growth)

Postwar

social

Keynesianis

m

Golden age

DEMAND REGIMES


Demand regimes, Y=C+I+NX+G

• An increase in the Wage Share leads to WS ↑• Effect on consumption (cw > cp) C ↑ • Effect on investment I (↑) ↓

– Domestic effect• Effect on net exports NX ↓

– Total effect Y ↓↑


Economic structure: wage-led and profit-led demand regimes


Demand regime

Profit-led Wage-led

Economic

structure

Small differentials in

propensities to consume

Propensity out of

wages is much higher

than the propensity

out of profits

Investment is highly sensitive to

profitability and accelerator

parameter is low

Investment is not

sensitive to

profitability and

accelerator

parameter is high

Very open economy with high

net export price elasticity

Relatively closed

economy with low net

export price elasticity

Effects of an increase in the wage share and demand regimes


Effect on total demand (or the

rate of capacity utilization)

Positive Negative

Effect on

investment

(or the rate of

accumulation)

Positive Wage-led demand

and

wage-led

investment

Negative Wage-led demand

and profit-led

investment

Profit-led

demand and

profit-led

investment

qqma

I

S0

S00 = I0

I, S

q0

Ica

qm

S1

E

Effects of an increase in the wage share in the canonical Kaleckian model


qqma

I0

S0

I0

I, S

q0

Ica

qm

S1

I2

I1

Effects of an increase in the wage share in the post-Kaleckian model


SUPPLY REGIMES:EFFECT ON CAPITAL STOCK AND PRODUCTIVITY


Economic structure: wage-led and profit-led productivity regimes


Productivity regime

Economic

structure

Profit

led

Wage restraint leads to productivity-

enhancing investment

Higher real wage growth leads to slower

productivity growth

Wage

led

Wage growth has strong positive effects on

labour effort and productivity–enhancing

investments

Higher real wage growth leads to faster

productivity growth (Webb effect)

Interaction between productivity and demand

• There is a lot of empirical evidence showing that faster overall growth, and faster growth in manufacturing, leads to faster productivity growth.

• This is the so-called Kaldor-Verdoorn effect• Thus, the effects of an increase in wages or the wage share,

besides their direct effect on productivity, will have an effect on aggregate demand that will have additional indirect effects on productivity.


Total productivity effect of an increase in the wage share, when the partial productivity regime is wage led


Demand

Regime

Direct

(partial)

productivity

effect

Indirect

productivity

effect

(Kaldor-

Verdoorn

effect)

Overall

combined

productivity

and demand

effect

Profit led Positive Negative Positive or

negative

Wage led Positive Positive Positive

Conclusion: The danger of an error of composition

• Several countries wish to pursue an export-led, restraining wages to gain a competitive advantage.

• But at the level of the whole world, planet earth is a closed economy. All countries cannot be net exporters.

• Even the eurozone is a relatively closed area.• Thus what really counts are the effects of an increase in the

wage share on domestic aggregate demand.• Empirical studies show that most countries are in a wage-led

domestic demand regime.• A wage-led growth strategy is thus conducive to the most

sustainable growth process.


Documents

Wage-led Growth: Concept, Theories and Policies