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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.

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Wage-led Growth: Concept, Theories and Policies

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  1. Wage-led Growth: Concept, Theories and Policies Marc Lavoie* and Engelbert Stockhammer**

  2. 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

  3. 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 RDW Conference, ILO, Geneva, 8 July 2011

  4. Distribution and growth. A conceptual framework RDW Conference, ILO, Geneva, 8 July 2011

  5. 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. RDW Conference, ILO, Geneva, 8 July 2011

  6. Pro-labour and pro-capital distributional policies RDW Conference, ILO, Geneva, 8 July 2011

  7. Definition of profit-led and wage-led economic regimes RDW Conference, ILO, Geneva, 8 July 2011

  8. Viability of growth regimes RDW Conference, ILO, Geneva, 8 July 2011

  9. Actual growth strategies RDW Conference, ILO, Geneva, 8 July 2011

  10. Demand regimes RDW Conference, ILO, Geneva, 8 July 2011

  11. 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 ↓↑ RDW Conference, ILO, Geneva, 8 July 2011

  12. Economic structure: wage-led and profit-led demand regimes RDW Conference, ILO, Geneva, 8 July 2011

  13. Effects of an increase in the wage share and demand regimes RDW Conference, ILO, Geneva, 8 July 2011

  14. Effects of an increase in the wage share in the canonical Kaleckian model S0 I, S S1 Ica E S00 = I0 I q0 qm qma q RDW Conference, ILO, Geneva, 8 July 2011

  15. Effects of an increase in the wage share in the post-Kaleckian model S0 I, S S1 I1 Ica I2 I0 I0 q0 qm qma q RDW Conference, ILO, Geneva, 8 July 2011

  16. Supply regimes:Effect on capital stock and productivity RDW Conference, ILO, Geneva, 8 July 2011

  17. Economic structure: wage-led and profit-led productivity regimes RDW Conference, ILO, Geneva, 8 July 2011

  18. 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. RDW Conference, ILO, Geneva, 8 July 2011

  19. Total productivity effect of an increase in the wage share, when the partial productivity regime is wage led RDW Conference, ILO, Geneva, 8 July 2011

  20. 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. RDW Conference, ILO, Geneva, 8 July 2011

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