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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 Pro-capital Policies 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 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 change share imposed on An increase in Wage-led Profit-led society the wage regime regime regime share RDW Conference, ILO, Geneva, 8 July 2011 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 RDW Conference, ILO, Geneva, 8 July 2011 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) 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 • Effect on consumption (cw > cp) • Effect on investment – Domestic effect • Effect on net exports – Total effect RDW Conference, ILO, Geneva, 8 July 2011 WS ↑ C↑ I (↑) ↓ NX ↓ Y ↓↑ 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 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 RDW Conference, ILO, Geneva, 8 July 2011 Effects of an increase in the wage share in the canonical Kaleckian model S0 I, S S1 Ica E I0 I q0 qc RDW Conference, ILO, Geneva, 8 July 2011 qca q Effects of an increase in the wage share in the post-Kaleckian model S0 I, S S1 Ica I1 I2 I0 I0 q0 qc RDW Conference, ILO, Geneva, 8 July 2011 qca q 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 investment structure 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 RDW Conference, ILO, Geneva, 8 July 2011 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. RDW Conference, ILO, Geneva, 8 July 2011