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Functional income distribution and aggregate demand in the Euro-area

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  • Engelbert Stockhammer

    ()
    (Department of Economics, Vienna University of Economics & B.A.)

  • Özlem Onaran

    ()
    (Department of Economics, Vienna University of Economics & B.A.)

  • Stefan Ederer

    ()
    (Department of Economics, Vienna University of Economics & B.A.)

Abstract

An increase in the wage share has contradictory effects on the subaggregates of aggregate demand. Private consumption expenditures ought to increase because wage incomes typically are associated with higher consumption propensities than capital incomes. Investment expenditures ought to be negatively affected because investment will positively depend on profits. Net exports will be negatively affected because an increase in the wage share corresponds to an increase in unit labor costs and thus a loss in competitiveness. Theoretically aggregate demand can therefore be either wage led or profit led depending on how these effects add up. The results will crucially depend on how open the economy is internationally. The paper estimates a Post-Kaleckian macro model incorporating these effects for the Euro area and finds that the Euro area is presently in a wage-led demand regime. Implications for wage policies are discussed.

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Paper provided by Vienna University of Economics, Department of Economics in its series Department of Economics Working Papers with number wuwp102.

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Date of creation: Feb 2007
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Handle: RePEc:wiw:wiwwuw:wuwp102

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