Diapositive 1 by D5D29A5

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									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




      RDW Conference, ILO, Geneva, 8 July 2011
DISTRIBUTION AND GROWTH.
A CONCEPTUAL FRAMEWORK

  RDW Conference, ILO, Geneva, 8 July 2011
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
   Pro-labour and pro-capital
   distributional policies
             Distributional policies                                Other factors

             Pro-capital                 Pro-labour

Policies     ’Labour market flexibility’ ’Welfare state’            Changes in technology
             Abolish minimum wages       Increase minimum wages     Globalisation
             Weaken collective           Strengthen collective      Financialization
             bargaining                  bargaining
             Impose wage moderation
Results      Weak wage growth            Rising real wages
             Wage share ↓                Stable (or ↑) wage share
             Increased wage              Decreased wage
             dispersion                  dispersion


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

                                              Overall impact on the economy
                                              Favourable     Unfavourable
Income                 An increase in Profit-led             Wage-led
distribution           the profit             regime         regime
change                 share
imposed on             An increase in Wage-led               Profit-led
society                the wage               regime         regime
                       share

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

                                       Distributional policies

                                       Pro-capital     Pro-labour

Economic          Profit-led           Profit-led      Stagnation or
regime                                 growth          unstable
                                       process         growth
                  Wage-led             Stagnation or Wage-led
                                       unstable        growth
                                       growth          process

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

                             Distributional policies and strategies


                             Pro-capital                               Pro-labour

Economic    Profit-led       ‘Trickle-down Neoliberalism’ – ‘Doomed social
regime                       Supply-side policies will generate reforms’
                             aggregate demand                           TINA

            Wage-led         ‘Neoliberalism         in   practice’   – Postwar social
                             Unstable and has to rely on Keynesianism
                             exogenous growth drivers (credit- Golden age
                             led growth, export-led growth)


         RDW Conference, ILO, Geneva, 8 July 2011
DEMAND REGIMES


 RDW Conference, ILO, Geneva, 8 July 2011
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
   Economic structure: wage-led and
   profit-led demand regimes
                 Demand regime
                 Profit-led                                      Wage-led
Economic         Small differentials in propensities to Propensity out of wages is
structure        consume                                         much         higher   than   the
                                                                 propensity out of profits
                 Investment         is   highly   sensitive   to Investment is not sensitive to
                 profitability and accelerator parameter is profitability and accelerator
                 low                                             parameter is high
                 Very open economy with high net export Relatively closed economy
                 price elasticity                                with low net export price
                                                                 elasticity


            RDW Conference, ILO, Geneva, 8 July 2011
    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              Positive         Wage-led demand and
investment (or the                      wage-led investment
rate of
                       Negative         Wage-led demand and      Profit-led demand
accumulation)
                                        profit-led investment    and profit-led
                                                                 investment



            RDW Conference, ILO, Geneva, 8 July 2011
Effects of an increase in the wage
share in the canonical Kaleckian model

     I, S                                              S0
                                                            S1
      Ica
                                     E
S00 = I0

                 I



                                    q0     qm    qma             q

      RDW Conference, ILO, Geneva, 8 July 2011
Effects of an increase in the wage
share in the post-Kaleckian model

  I, S                                              S0
                                                         S1
                                                                   I1
   Ica
                                                              I2
  I0
              I0




                                 q0     qm    qma                       q

   RDW Conference, ILO, Geneva, 8 July 2011
SUPPLY REGIMES:
EFFECT ON CAPITAL STOCK
AND PRODUCTIVITY


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

Economic            Profit led       Wage     restraint   leads   to   productivity-enhancing

structure                            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)




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

Demand Regime       Direct (partial)             Indirect   Overall combined
                  productivity effect productivity effect productivity and
                                         (Kaldor-Verdoorn    demand effect
                                                  effect)


  Profit led            Positive                 Negative      Positive or
                                                                negative
   Wage led             Positive                 Positive       Positive



      RDW Conference, ILO, Geneva, 8 July 2011
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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