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

  • Mauro Napoletano
  • Giovanni Dosi
  • Giorgio Fagiolo
  • Andrea Roventini

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.

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Article provided by Presses de Sciences-Po in its journal Revue de l'OFCE.

Volume (Year): N° 124 (2012)
Issue (Month): 5 ()
Pages: 235-261

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Handle: RePEc:cai:reofsp:reof_124_0235
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  1. Giovanni Dosi & Giorgio Fagiolo & Mauro Napoletano & Andrea Roventini, 2012. "Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model," Documents de Travail de l'OFCE 2012-06, Observatoire Francais des Conjonctures Economiques (OFCE).
  2. Greenwald, Bruce C & Stiglitz, Joseph E, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 77-114, February.
  3. Silvia Fabiani & Martine Druant & Ignacio Hernando & Claudia Kwapil & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Mathä & Roberto Sabbatini & Harald Stahl & Ad Stokman, 2006. "What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
  4. Mario Amendola & Jean-Luc Gaffard & Francesco Saraceno, 2001. "Wage Flexibility and Unemployment: The Keynesian Perspective Revisited," Documents de Travail de l'OFCE 2001-02, Observatoire Francais des Conjonctures Economiques (OFCE).
  5. G. Fagiolo & G. Dosi & R. Gabriele, 2004. "Matching, Bargaining, And Wage Setting In An Evolutionary Model Of Labor Market And Output Dynamics," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 157-186.
  6. Peter Howitt, 1986. "Wage Flexibility and Employment," Eastern Economic Journal, Eastern Economic Association, vol. 12(3), pages 237-242, Jul-Sep.
  7. Giovanni Dosi & Giorgio Fagiolo & Andrea Roventini, 2008. "Schumpeter Meeting Keynes: A Policy-Friendly Model of Endogenous Growth and Business Cycles," Working Papers 50/2008, University of Verona, Department of Economics.
  8. Silvia Fabiani & Martine Druant & Ignacio Hernando & Claudia Kwapil & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Mathä & Roberto Sabbatini & Harald Stahl & Ad Stokman, 2005. "The pricing behaviour of firms in the Euro area: new survey evidence," Banco de Espa�a Working Papers 0536, Banco de Espa�a.
  9. Austan Goolsbee, 1998. "The Business Cycle, Financial Performance, and the Retirement of Capital Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 474-496, April.
  10. Feldstein, Martin S & Foot, David K, 1971. "The Other Half of Gross Investment: Replacement and Modernization Expenditures," The Review of Economics and Statistics, MIT Press, vol. 53(1), pages 49-58, February.
  11. Gatti, Domenico Delli & Guilmi, Corrado Di & Gaffeo, Edoardo & Giulioni, Gianfranco & Gallegati, Mauro & Palestrini, Antonio, 2005. "A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 489-512, April.
  12. Alessandra Del Boca & Marzio Galeotti & Charles P. Himmelberg & Paola Rota, 2008. "Investment and Time to Plan and Build: A Comparison of Structures vs. Equipment in A Panel of Italian Firms," Journal of the European Economic Association, MIT Press, vol. 6(4), pages 864-889, 06.
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