IDEAS home Printed from https://ideas.repec.org/a/cup/macdyn/v24y2020i1p191-230_10.html
   My bibliography  Save this article

Are Higher Wages Good For Business? An Assessment Under Alternative Innovation And Investment Scenarios

Author

Listed:
  • Caiani, Alessandro
  • Russo, Alberto
  • Gallegati, Mauro

Abstract

This paper aims at investigating the interplay between inequality, innovation dynamics, and investment behaviors in shaping the long-run patterns of growth of a closed economy. By extending the analysis proposed in Caiani et al. [(2018) Journal of Evolutionary Economics], we explore the effects of alternative wage regimes under different investment and technological change scenarios. Experimental results seem to de-emphasize the role of technological progress as a possible source of greater inequality. Overall, simulation results are consistent with the predominance of a wage-led growth regime in most of the scenarios analyzed: A faster growth of low- and middle-level workers’ wages, relative to managers’, generally exert beneficial effects on the economy and allows to counteract the labor-saving effects of technological progress. Furthermore, a distribution more favorable to workers does not compromise firms’ profitability, but rather strengthen it by creating a more favorable macroeconomic environment, which encourages further innovations, stimulates investment, and sustains economic growth.

Suggested Citation

  • Caiani, Alessandro & Russo, Alberto & Gallegati, Mauro, 2020. "Are Higher Wages Good For Business? An Assessment Under Alternative Innovation And Investment Scenarios," Macroeconomic Dynamics, Cambridge University Press, vol. 24(1), pages 191-230, January.
  • Handle: RePEc:cup:macdyn:v:24:y:2020:i:1:p:191-230_10
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S1365100518000299/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. A. P. Thirlwall, 2015. "A Plain Man’s Guide to Kaldor’s Growth Laws," Palgrave Studies in the History of Economic Thought, in: Essays on Keynesian and Kaldorian Economics, chapter 14, pages 326-338, Palgrave Macmillan.
    2. Engelbert Stockhammer & Ozlem Onaran, 2013. "Wage-led growth: theory, evidence, policy," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(1), pages 61-78, January.
    3. Weinhold, Diana & Nair-Reichert, Usha, 2009. "Innovation, Inequality and Intellectual Property Rights," World Development, Elsevier, vol. 37(5), pages 889-901, May.
    4. Tommaso Ciarli & André Lorentz & Maria Savona & Marco Valente, 2010. "The Effect Of Consumption And Production Structure On Growth And Distribution. A Micro To Macro Model," Metroeconomica, Wiley Blackwell, vol. 61(1), pages 180-218, February.
    5. Marc Lavoie, 1992. "Foundations of Post-Keynesian Economic Analysis," Books, Edward Elgar Publishing, number 275.
    6. Luca Riccetti & Alberto Russo & Mauro Gallegati, 2015. "An agent based decentralized matching macroeconomic model," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 305-332, October.
    7. Thomas Piketty & Emmanuel Saez & Stefanie Stantcheva, 2014. "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 230-271, February.
    8. Michael Kumhof & Romain Rancière & Pablo Winant, 2015. "Inequality, Leverage, and Crises," American Economic Review, American Economic Association, vol. 105(3), pages 1217-1245, March.
    9. Engelbert Stockhammer & Özlem Onaran & Stefan Ederer, 2009. "Functional income distribution and aggregate demand in the Euro area," Cambridge Journal of Economics, Oxford University Press, vol. 33(1), pages 139-159, January.
    10. Lawrence F. Katz & Kevin M. Murphy, 1992. "Changes in Relative Wages, 1963–1987: Supply and Demand Factors," The Quarterly Journal of Economics, Oxford University Press, vol. 107(1), pages 35-78.
    11. Daron Acemoglu, 1998. "Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality," The Quarterly Journal of Economics, Oxford University Press, vol. 113(4), pages 1055-1089.
    12. Ozlem Onaran & Thomas Obst, 2016. "Wage-led growth in the EU15 member-states: the effects of income distribution on growth, investment, trade balance and inflation," Cambridge Journal of Economics, Oxford University Press, vol. 40(6), pages 1517-1551.
    13. Antonelli, Cristiano & Gehringer, Agnieszka, 2013. "Innovation and Income Inequality," Department of Economics and Statistics Cognetti de Martiis LEI & BRICK - Laboratory of Economics of Innovation "Franco Momigliano", Bureau of Research in Innovation, Complexity and Knowledge, Collegio 201311, University of Turin.
    14. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 3-71, March.
    15. John McCombie & Maurizio Pugno & Bruno Soro (ed.), 2002. "Productivity Growth and Economic Performance," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-50423-3, June.
    16. Thomas Piketty & Gabriel Zucman, 2014. "Capital is Back: Wealth-Income Ratios in Rich Countries 1700–2010," The Quarterly Journal of Economics, Oxford University Press, vol. 129(3), pages 1255-1310.
    17. Carlin, Wendy & Soskice, David, 1990. "Macroeconomics and the Wage Bargain: A Modern Approach to Employment, Inflation, and the Exchange Rate," OUP Catalogue, Oxford University Press, number 9780198772446.
    18. Michael Waldman, 1984. "Worker Allocation, Hierarchies and the Wage Distribution," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 95-109.
    19. Daron Acemoglu, 2002. "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 7-72, March.
    20. Cristiano Perugini & Jens Hölscher & Simon Collie, 2016. "Inequality, credit and financial crises," Cambridge Journal of Economics, Oxford University Press, vol. 40(1), pages 227-257.
    21. Isabelle Salle & Murat Yıldızoğlu, 2014. "Efficient Sampling and Meta-Modeling for Computational Economic Models," Computational Economics, Springer;Society for Computational Economics, vol. 44(4), pages 507-536, December.
    22. Philippe Aghion & Ufuk Akcigit & Antonin Bergeaud & Richard Blundell & David Hemous, 2019. "Innovation and Top Income Inequality," Review of Economic Studies, Oxford University Press, vol. 86(1), pages 1-45.
    23. Winter, Sidney G., 1984. "Schumpeterian competition in alternative technological regimes," Journal of Economic Behavior & Organization, Elsevier, vol. 5(3-4), pages 287-320.
    24. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
    25. Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Russo, Alberto & Stiglitz, Joseph E., 2010. "The financial accelerator in an evolving credit network," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1627-1650, September.
    26. Verdier, Thierry & Acemoglu, Daron & Robinson, James A., 2012. "Can't We All Be More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World," CEPR Discussion Papers 9113, C.E.P.R. Discussion Papers.
    27. Eckhard Hein & Lena Vogel, 2008. "Distribution and growth reconsidered: empirical results for six OECD countries," Cambridge Journal of Economics, Oxford University Press, vol. 32(3), pages 479-511, May.
    28. Michael Kumhof & Romain Rancière & Pablo Winant, 2015. "Inequality, Leverage, and Crises," Post-Print halshs-01511070, HAL.
    29. Engelbert Stockhammer & Robert Stehrer, 2011. "Goodwin or Kalecki in Demand? Functional Income Distribution and Aggregate Demand in the Short Run," Review of Radical Political Economics, Union for Radical Political Economics, vol. 43(4), pages 506-522, December.
    30. Caiani, Alessandro & Russo, Alberto & Gallegati, Mauro, 2016. "Does Inequality Hamper Innovation and Growth?," MPRA Paper 71864, University Library of Munich, Germany.
    31. Dosi, Giovanni & Fagiolo, Giorgio & Roventini, Andrea, 2010. "Schumpeter meeting Keynes: A policy-friendly model of endogenous growth and business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1748-1767, September.
    32. Florence Jaumotte & Carolina Osorio Buitron, 2015. "Inequality and Labor Market Institutions," IMF Staff Discussion Notes 15/14, International Monetary Fund.
    33. repec:ilo:ilowps:478623 is not listed on IDEAS
    34. Charles I. Jones & Jihee Kim, 2018. "A Schumpeterian Model of Top Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 126(5), pages 1785-1826.
    35. Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2004. "Do the Rich Save More?," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 397-444, April.
    36. Daron Acemoglu, 2007. "Equilibrium Bias of Technology," Econometrica, Econometric Society, vol. 75(5), pages 1371-1409, September.
    37. Robert VERGEER & Alfred KLEINKNECHT, 2014. "Do labour market reforms reduce labour productivity growth? A panel data analysis of 20 OECD countries (1960–2004)," International Labour Review, International Labour Organization, vol. 153(3), pages 365-393, September.
    38. Caiani, Alessandro & Godin, Antoine & Caverzasi, Eugenio & Gallegati, Mauro & Kinsella, Stephen & Stiglitz, Joseph E., 2016. "Agent based-stock flow consistent macroeconomics: Towards a benchmark model," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 375-408.
    39. Storm, Servaas & Naastepad, C. W. M., 2012. "Macroeconomics Beyond the NAIRU," Economics Books, Harvard University Press, number 9780674062276, Spring.
    40. Onaran, Özlem. & Galanis, Giorgos., 2012. "Is aggregate demand wage-led or profit-led? National and global effects," ILO Working Papers 994786233402676, International Labour Organization.
    41. Alberto Russo & Luca Riccetti & Mauro Gallegati, 2016. "Increasing inequality, consumer credit and financial fragility in an agent based macroeconomic model," Journal of Evolutionary Economics, Springer, vol. 26(1), pages 25-47, March.
    42. Dutt, Amitava Krishna, 1987. "Alternative Closures Again: A Comment on 'Growth, Distribution and Inflation.'," Cambridge Journal of Economics, Oxford University Press, vol. 11(1), pages 75-82, March.
    43. Isabelle Salle & Murat Yıldızoğlu, 2014. "Efficient Sampling and Meta-Modeling for Computational Economic Models," Computational Economics, Springer;Society for Computational Economics, vol. 44(4), pages 507-536, December.
    44. Ms. Florence Jaumotte & Ms. Carolina Osorio Buitron, 2015. "Inequality and Labor Market Institutions," IMF Staff Discussion Notes 2015/014, International Monetary Fund.
    45. Philippe Aghion & Peter Howitt, 1997. "Endogenous Growth Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262011662, December.
    46. Robert Vergeer & Alfred Kleinknecht, 2010. "The impact of labor market deregulation on productivity: a panel data analysis of 19 OECD countries (1960-2004)," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 33(2), pages 371-408, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. [Segnalazioni] Salari e disuguaglianza, Europa, ruolo nel credito nelle recessioni
      by keynesblog in Keynes Blog on 2017-08-23 22:05:03

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Eugenio Caverzasi & Alberto Russo, 2018. "Toward a new microfounded macroeconomics in the wake of the crisis," Industrial and Corporate Change, Oxford University Press, vol. 27(6), pages 999-1014.
    2. Catullo, Ermanno & Gallegati, Mauro & Russo, Alberto, 2022. "Forecasting in a complex environment: Machine learning sales expectations in a stock flow consistent agent-based simulation model," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    3. Fierro, Luca Eduardo & Caiani, Alessandro & Russo, Alberto, 2022. "Automation, Job Polarisation, and Structural Change," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 499-535.
    4. Patrick Mellacher, 2021. "Growth, Inequality and Declining Business Dynamism in a Unified Schumpeter Mark I + II Model," Papers 2111.09407, arXiv.org, revised Nov 2023.
    5. Lucrezia Fanti, 2018. "An AB-SFC Model of Induced Technical Change along Classical and Keynesian Lines," Working Papers 3/18, Sapienza University of Rome, DISS.
    6. Claudius Gräbner & Anna Hornykewycz, 2022. "Capability accumulation and product innovation: an agent-based perspective," Journal of Evolutionary Economics, Springer, vol. 32(1), pages 87-121, January.
    7. Alberto Botta, 2020. "The short- and long-run inconsistency of the expansionary austerity theory: a post-Keynesian/evolutionist critique," Journal of Evolutionary Economics, Springer, vol. 30(1), pages 143-177, January.
    8. Alessandro Caiani & Ermanno Catullo, 2023. "Fiscal Transfers and Common Debt in a Monetary Union: A Multi-Country Agent Based-Stock Flow Consistent Model," LEM Papers Series 2023/19, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    9. Terranova, Roberta & Turco, Enrico M., 2022. "Concentration, stagnation and inequality: An agent-based approach," Journal of Economic Behavior & Organization, Elsevier, vol. 193(C), pages 569-595.
    10. Lucrezia Fanti, 2021. "‘Kaldor Facts’ and the decline of Wage Share: An agent based-stock flow consistent model of induced technical change along Classical and Keynesian lines," Journal of Evolutionary Economics, Springer, vol. 31(2), pages 379-415, April.
    11. Emiliano Brancaccio & Mauro Gallegati & Raffaele Giammetti, 2022. "Neoclassical influences in agent‐based literature: A systematic review," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 350-385, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Caiani, Alessandro & Russo, Alberto & Gallegati, Mauro, 2016. "Does Inequality Hamper Innovation and Growth?," MPRA Paper 71864, University Library of Munich, Germany.
    2. Alessandro Caiani & Alberto Russo & Mauro Gallegati, 2019. "Does inequality hamper innovation and growth? An AB-SFC analysis," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 177-228, March.
    3. Caiani, Alessandro & Catullo, Ermanno & Gallegati, Mauro, 2019. "The effects of alternative wage regimes in a monetary union: A multi-country agent based-stock flow consistent model," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 389-416.
    4. Eckhard Hein, 2017. "Post-Keynesian macroeconomics since the mid 1990s: main developments," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 14(2), pages 131-172, September.
    5. Alberto Russo, 2017. "An Agent Based Macroeconomic Model with Social Classes and Endogenous Crises," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 3(3), pages 285-306, November.
    6. Catullo, Ermanno & Gallegati, Mauro & Russo, Alberto, 2022. "Forecasting in a complex environment: Machine learning sales expectations in a stock flow consistent agent-based simulation model," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    7. Giovanni Dosi & Andrea Roventini, 2019. "More is different ... and complex! the case for agent-based macroeconomics," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 1-37, March.
    8. Eugenio Caverzasi & Alberto Russo, 2018. "Toward a new microfounded macroeconomics in the wake of the crisis," Industrial and Corporate Change, Oxford University Press, vol. 27(6), pages 999-1014.
    9. Giorgio Fagiolo & Andrea Roventini, 2017. "Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 20(1), pages 1-1.
    10. repec:hal:spmain:info:hdl:2441/dcditnq6282sbu1u151qe5p7f is not listed on IDEAS
    11. Robert A. Blecker, 2016. "Wage-led versus profit-led demand regimes: the long and the short of it," Review of Keynesian Economics, Edward Elgar Publishing, vol. 4(4), pages 373-390, October.
    12. Tommaso Ciarli & André Lorentz & Marco Valente & Maria Savona, 2019. "Structural changes and growth regimes," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 119-176, March.
    13. Philippe Aghion & Ufuk Akcigit & Antonin Bergeaud & Richard Blundell & David Hemous, 2019. "Innovation and Top Income Inequality," Review of Economic Studies, Oxford University Press, vol. 86(1), pages 1-45.
    14. Engelbert Stockhammer & Ozlem Onaran, 2013. "Wage-led growth: theory, evidence, policy," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(1), pages 61-78, January.
    15. Laura Carvalho & Corrado Di Guilmi, 2020. "Technological unemployment and income inequality: a stock-flow consistent agent-based approach," Journal of Evolutionary Economics, Springer, vol. 30(1), pages 39-73, January.
    16. Guilmi, Corrado Di & Fujiwara, Yoshi, 2022. "Dual labor market, financial fragility, and deflation in an agent-based model of the Japanese macroeconomy," Journal of Economic Behavior & Organization, Elsevier, vol. 196(C), pages 346-371.
    17. Lilian N. Rolim & Carolina Troncoso Baltar & Gilberto Tadeu Lima, 2023. "Income distribution, productivity growth, and workers’ bargaining power in an agent-based macroeconomic model," Journal of Evolutionary Economics, Springer, vol. 33(2), pages 473-516, April.
    18. Papadopoulos, Georgios, 2019. "Income inequality, consumption, credit and credit risk in a data-driven agent-based model," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 39-73.
    19. Lavoie, M. & Stockhammer, Engelbert,, 2012. "Wage-led growth : concepts, theories and policies," ILO Working Papers 994709363402676, International Labour Organization.
    20. Emanuele Russo, 2021. "Harrodian instability in decentralized economies: an agent-based approach," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 38(2), pages 539-567, July.
    21. Jochen Hartwig, 2018. "Wachstumsfolgen von Einkommensungleichheit – Theorie, empirische Evidenz und Politikempfehlungen," Chemnitz Economic Papers 020, Department of Economics, Chemnitz University of Technology.

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:macdyn:v:24:y:2020:i:1:p:191-230_10. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/mdy .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.