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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. Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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) Jornada de Economia Politica, UNQ, Argentina, 2012 Outline • A conceptual framework: policies versus regimes • Demand regimes • Productivity regimes Jornada de Economia Politica, UNQ, Argentina, 2012 A CONCEPTUAL FRAMEWORK Jornada de Economia Politica, UNQ, Argentina, 2012 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. Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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) Jornada de Economia Politica, UNQ, Argentina, 2012 DEMAND REGIMES Jornada de Economia Politica, UNQ, Argentina, 2012 Preliminary micro issue: no profit-maximizing constraint; sales constraint instead p UC p MC Profit per unit MC qnormal qfull capacity Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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. Jornada de Economia Politica, UNQ, Argentina, 2012 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) Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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. Jornada de Economia Politica, UNQ, Argentina, 2012 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). Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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. Jornada de Economia Politica, UNQ, Argentina, 2012 SUPPLY EFFECTS: PRODUCTIVITY REGIMES Jornada de Economia Politica, UNQ, Argentina, 2012 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) Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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 Jornada de Economia Politica, UNQ, Argentina, 2012 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! Jornada de Economia Politica, UNQ, Argentina, 2012 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. Jornada de Economia Politica, UNQ, Argentina, 2012 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. Jornada de Economia Politica, UNQ, Argentina, 2012