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Functional income distribution and aggregate demand in the Euro-area

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Author Info
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.)

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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 and B.A., 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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Find related papers by JEL classification:
E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E25 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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  1. Eckhard Hein & Artur Tarassow, 2008. "Distribution, aggregate demand and productivity growth - theory and empirical results for six OECD countries based on a Post-Kaleckian model," IMK Working Paper 18-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute. [Downloadable!]
  2. Engelbert Stockhammer & Stefan Ederer, 2008. "Demand effects of the falling wage share in Austria," Empirica, Springer, vol. 35(5), pages 481-502, December. [Downloadable!] (restricted)
    Other versions:
  3. Özlem Onaran, 2008. "The effect of foreign affiliate employment on wages, employment, and the wage share in Austria," Department of Economics Working Papers wuwp118, Vienna University of Economics and B.A., Department of Economics. [Downloadable!]
  4. Peter Skott, 2008. "Theoretical and empirical shortcomings of the Kaleckian investment function," Working Papers 2008-11, University of Massachusetts Amherst, Department of Economics. [Downloadable!]
  5. Eckhard Hein & Marc Lavoie & Till van Treeck, 2008. "Some instability puzzles in Kaleckian models of growth and distribution: A critical survey," IMK Working Paper 19-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute. [Downloadable!]
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