Transcript Wage led

Wage-led Growth:
Concept, Theories
and Policies
Marc Lavoie
In collaboration with
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, leading to global imbalances.
• A new wage-led growth strategy is needed.
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Wage-led economic strategy
• Tied to underconsumption theories (Malthus,
Sismondi, Hobson)
• Tied to the Marxist profit realization problem (Kalecki,
Baran and Sweezy, Steindl, Bhaduri)
• Linked with neo-Kaleckian models (Rowthorn, Taylor,
Dutt) that emphasize demand and paradoxes
• Linked with the Kaldorian tradition, which emphasizes
the fact that, within limits, demand can create its own
supply
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ILO project: New perspectives on wages and
economic growth: potentials of wage-led growth
• 1. Conceptual clarification (Lavoie, Stockhammer)
• 2. Why has the wage share been falling?
(Stockhammer)
• 3. A mapping of wage-led and profit-led demand
(Özlem Onaran, Giorgos Galanis)
• 4. A mapping of wage-led and profit-led supply
(Storm, Naastepad)
• 5. The impact of income polarization (Van Treeck,
Sturn)
• 6. The impact of financialization (Hein, Mundt)
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Outline
• A conceptual framework: policies versus regimes
• Demand regimes
• Productivity regimes
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A CONCEPTUAL FRAMEWORK
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The crucial distinction
• One has to distinguish between
• (1) the policies that are being pursued in a country to
promote a certain kind of growth regime;
• (2) and the economic growth regime that this country
is actually into, and hence how the economy will
react to the policies being put forward.
• (1) Distributional policies are either pro-labour or procapital;
• (2) Actual growth regimes are wage-led or profit-led.
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Pro-labour and pro-capital
distributional policies
Distributional policies
Pro-capital
Policies
Results
Other factors
Pro-labour
‘Labour market flexibility’ ‘Welfare state’
Changes in technology
Abolish minimum wages
Increase minimum wages
Globalisation
Weaken collective
Strengthen collective
Financialization
bargaining, rights to strike bargaining
Fiscal policies
Impose wage moderation
Monetary policies
Weak wage growth
Rising real wages
Wage share ↓
Stable (or ↑) wage share
Increased wage
Decreased wage
dispersion
dispersion
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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
change
share
imposed on
An increase in Wage-led
Profit-led
society
the wage
regime
regime
regime
share
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Viability of growth regimes
Distributional policies
Economic
Profit-led
regime
Wage-led
Pro-capital
Pro-labour
Profit-led
Stagnation or
growth
unstable
process
growth
Stagnation or Wage-led
unstable
growth
growth
process
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Actual growth strategies
Distributional policies and strategies
Pro-capital
Economic
Profit-led
regime
Pro-labour
‘Trickle-down Neoliberalism’ – ‘Doomed social
Supply-side policies will generate reforms’
aggregate demand
Wage-led
‘Neoliberalism
in
TINA
practice’
– Postwar social
Unstable and has to rely on Keynesianism
exogenous growth drivers (credit- Golden age
led growth, export-led growth)
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DEMAND REGIMES
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Preliminary micro issue: no profit-maximizing
constraint; sales constraint instead
p
UC
p
MC
Profit per
unit
MC
qnormal
qfull capacity
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q
Marché du travail
w/p
LS
T2
(w/p)fe2
T1
(w/p)fe1
LDeffective
a/T2 a/T1
L2
Lfe
L
Marché du travail, équilibres multiples
w/p
LS
T
H
(w/p)H
LD effective
(w/p)0
(w/p)B
B
LfeB L0D
L0S LfeH
L
Demand regimes, Y=C+I+NX+G
• An increase in the Wage Share leads to
• Domestic demand effects
– Effect on consumption (sp > sw )
– Effect on investment
• Effect on net exports
Total demand effect
WS ↑
C↑
I (↑) ↓
NX ↓
Y ↓↑
• Various studies indicate that the propensity to save out of profits
is about 0.40 above the propensity to save out of wages
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Effect of an increase in the wage share in the
canonical Kaleckian model (multiplier and accelerator)
S0
I, S
S1
G
Ia
S00 = I0
S01
E
F
I
q0
qm
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qma
q
Effects of an increase in the wage share in
the post-Kaleckian model (profitability effect)
I, S
S0
S1
Ia
I1
I0
I2
I0
q0
qm
qma
q
Effects of an increase in the wage
share and demand regimes
Effect on total demand (or the rate of
capacity utilization)
Positive
Effect on
Positive
investment (or the
Negative
Wage-led demand and
wage-led investment
rate of
accumulation)
Negative
Wage-led demand and
Profit-led demand
profit-led investment
and profit-led
investment
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A note on the empirical work
assessing demand regimes
• It should be pointed out that usually in empirical studies of the
demand regimes, the accelerator effect is not taken into
account.
• The researcher only looks at the short-run multiplier and
profitability effects.
• This means that, by construction, as long as we suppose that
the profitability effect is negative or nil, an increase in the wage
share will have a negative effect on the investment component
of aggregate demand.
• Thus, in those studies, by construction, we cannot have a wageled investment demand.
• As to the effect on net exports, these depend on unit labor costs
and hence will normally react negatively to a higher wage share.
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Effects of an increase in the wage share and
domestic and total demand regimes
Effect on total aggregate demand ,
including net exports
Effect on
Positive
domestic
aggregate
demand
Positive
Negative
Wage-led domestic
demand regime and
wage-led total
demand regime
Wage-led domestic
demand regime
and profit-led total
demand regime
Negative
(investment and
consumption only)
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Profit-led domestic
demand regime
and profit-led total
demand regime
Economic structure: wage-led and
profit-led demand regimes
Demand regime
Profit-led
Economic
structure
Wage-led
Small differentials in propensities to Propensity out of wages is
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
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Past empirical results on demand regimes
Domestic Demand
wage-led
Total Demand
Profit-led
wage-led
Euro area
SOE09, OG12
SOE09, OG12
Germany
BB95, NS07, HV08,
NS07, HV08,
SHG11, SS11, OG12
SHG11, OG12
BB95, NS07, ES07,
(SO04), NS07,
HV08, SS11, OG12
HV08, OG12
France
NL
NS07, SS11
Austria
SE08, HV08, SS11
UK
BB95, NS07, HV08
HV08
NS07
Profit-led
BB95
BB95, SE07
HV08
SE08, HV08
SS11
OG12
BB95, NS07,
HV08, OG12
Japan
BB95, OG12
NS07
OG12
BB95, NS07
USA
BB95, HV08, OSG12,
NS07
BB95, HV08,
(SO04), NS07,
OSG12, OG12
BFT06
(SS11), OG12
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A summary of these empirical results
• Most countries seem to be on a wage-led domestic
demand regime.
• Some of these countries turn to a profit-led total
demand regime when international trade is taken into
account.
• Most studies conclude that the USA are in a wageled domestic demand regime;
– and the latest studies even conclude that the USA
are in a wage-led total demand regime.
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New empirical results; Onaran (2012) on
most G20 countries (80% of world GDP)
• All countries have wage-led domestic demand.
• Most developed countries have wage-led total
demand, including the overall eurozone, except
staple-led countries Canada and Australia.
• Large developing countries (Argentina, Mexico,
China, India, South Africa) have profit-led total
demand, except Turkey and Korea.
• In Argentina, a 1% point increase in the wage share
leads to an increase of 0.20 % increase in domestic
demand but a 0.07% decrease in total demand
(GDP).
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Effect of worldwide
Effects of national increase in profit share on
increase in profit
share on aggregate
demand
private excess
C/Y
I/Y
NX/Y
demand/Y
aggregate demand
A
B
C
D (A+B+C)
E
G
Euro area-12
-0.439
0.299
0.057
-0.084
-0.133
-0.245
Germany
-0.501
0.376
0.096
-0.029
-0.031
-
France
-0.305
0.088
0.198
-0.020
-0.027
-
Italy
-0.356
0.130
0.126
-0.100
-0.173
-
United Kingdom
-0.303
0.120
0.158
-0.025
-0.030
-0.214
United States
-0.426
0.000
0.037
-0.388
-0.808
-0.921
Japan
-0.353
0.284
0.055
-0.014
-0.034
-0.179
Canada
-0.326
0.182
0.266
0.122
0.148
-0.269
Australia
-0.256
0.174
0.272
0.190
0.268
0.172
Turkey
-0.491
0.000
0.283
-0.208
-0.459
-0.717
Mexico
-0.438
0.153
0.381
0.096
0.106
-0.111
Korea
-0.422
0.000
0.359
-0.063
-0.115
-0.864
Argentina
-0.153
0.015
0.192
0.054
0.075
-0.103
China
-0.412
0.000
1.986
1.574
1.932
1.115
India
-0.291
0.000
0.310
0.018
0.040
-0.027
South Africa
-0.145
0.129
0.506
0.490
0.729
0.390
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An error of composition
• While a country may be under a profit-led demand regime when
looking at the total effect of an increase in the wage share, a
simultaneous increase in the wage share of all countries
may still have a positive effect on the aggregate demand of a
profit-led country if its domestic demand is wage-led.
• Onaran (2012) performs this experiment. She finds that most
countries or regions, including Argentina, benefit from a
simultaneous increase in the wage share, with the exception of
Australia and China.
• She also finds that a 1% point increase in the wage share of all
countries leads to a 0.36% increase in world GDP.
• This means that some individual countries can successfully
pursue beggar-thy-neighbour policies via wage moderation, but
this does not constitute a viable strategy for demand on a global
scale.
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SUPPLY EFFECTS:
PRODUCTIVITY REGIMES
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Economic structure: wage-led and
profit-led productivity regimes
Direct or Partial Productivity regime
Economic
Profit led
Wage
restraint
leads
to
productivity-enhancing
investment
structure
Higher real wage growth leads to slower productivity
growth
Wage led
Wage growth has strong positive effects on labour effort
and on productivity–enhancing investments, in an
attempt to to recover profitability
Higher real wage growth leads to faster productivity
growth (efficiency wage hypothesis, Webb effect)
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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, an increase in real wages or the wage share, besides its
direct effect on productivity, will have an additional indirect effect
on productivity, through the impact of the wage share on
aggregate demand, and hence, through the Kaldor-Verdoorn
effect, on productivity growth.
• The strenght of the demand regime will also be affected by the
feedback effects of the productivity regime
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Direct impact on productivity growth of an increase in
wage share or in growth rate of real wages
Output growth
Profit-led
Productivity
Kaldor-Verdoorn
relationship
Wage-led
productivity
E
x0
Productivity
growth
pp
p0
pw
Combining the productivity and the
demand regimes
•
•
•
•
•
x = a0 + a1(w – p)
the demand equation
p = b0 + b1.x + b2.w the productivity equation
dx/dw = a1(1 - b2) /(1 + a1b1)
dp/dw = (b2 + a1b1) /(1 + a1b1)
With the combination of a wage-led demand
regime and a wage-led productivity regime
(all coefficients positive), the positive effects
of increases in real wages will be enhanced
for productivity, but diminished for demand
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Direct and indirect impact of growth rate of
real wages with wage-led regimes
Kaldor-Verdoorn
relationship
Output growth
xd
D
DP
xt
P
x0
Wage-led
demand
p0
pp
pt
Productivity
growth
The impact of an increase in real wages combining
the productivity and the demand regimes
•
•
•
•
•
x = a0 + a1(w – p)
the demand equation
p = b0 + b1.x + b2.w the productivity equation
dx/dw = a1(1 - b2) /(1 + a1b1) = .19
dp/dw = (b2 + a1b1) /(1 + a1b1) = .35
With a1 = b1 = b2 = 0.30
• And hence the change in the growth rate of
employment is:
• dx/dw - dp/dw = .19 - .35 = -.16 !!!!!
• The impact on employment growth is negative!
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A case of ommitted variable?
• Perhaps there is an omitted variable. In the demand equation,
instead of:
• x = a0 + a1(w – p)
• perhaps we should have:
• x = a0 + a1(w – p) + a2.p
• meaning that high productivity growth (technical progress)
induces faster capital accumulation and hence faster output
growth.
• In this case, the negative impact on employment would be
dampened.
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Conclusion: The real world is not so simple
• Several countries wish to pursue an export-led policy,
restraining wages to gain a competitive advantage.
• But planet earth is a closed economy. All countries cannot be
net exporters.
• 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.
• In such countries, rising real wages will generate high rates of
productivity growth.
• Thus, it is possible that a wage-led growth strategy might slow
down employment growth (technological unemployment).
• This strategy requires other expansionary policies.
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