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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
•
•
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•
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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