Wage Formation, Investment Behavior and Growth Regimes: An Agent-Based Analysis

Using the ?Keynes+Schumpeter? (K+S) agent-based model developed in Dosi et al. (2010, 2012) we study how the interplay between firms? investment behavior and income distribution shapes the short?and long-run dynamics of the economy at the aggregate level. We study the dynamics of investment under two different scenarios. One in which investment is fully determined by past profits, and one in which investment is tied to expectations about future consumption demand. We show that, independently from the investment scenario analyzed, the emergence of steady growth with low unemployment requires a balance in the income distribution between profits and wages. If this is not the case, the economy gets locked either in stagnation equilibria, or into growth trajectories displaying high volatility and unemployment rates. Moreover, in the demand-led scenario we show the emergence of a non-linear relation between real wages and unemployment. Finally, we study whether increasing degrees of wage-flexibility are able to restore growth and unemployment and reduce the volatility in the economy. We show that this is indeed the case only when investment is profit-led. In contrast, in the scenario where investment is driven by demand expectations wage-flexibility has no effect on either growth and unemployment. In turn, this result casts doubts on the ability of wage-flexibility policies to stabilize the economy.