Labor market stability in a zero-growth economy: a post-Keynesian approach

If respecting planetary boundaries requires a halt in economic growth, it is crucial to explore the macroeconomic stability of non-growing economies. Using a Kaleckian autonomous demand-led growth model, this paper explores the dynamic stability of the labor market in a zero-growth economy (ZGE) with productivity growth. In the model, net investment responds to deviations of capacity utilization from target utilization in the short run, while in the long run it adjusts to firms’ sales growth expectations determined by the growth rate in autonomous government expenditures. Hence, the growth rate of the system is determined by the autonomous growth rate of government expenditures – set equal to zero – and the rate of capacity utilization converges toward the normal rate. Considering the feedback effects between productivity, distribution, and employment, we first show that the long-run convergence to a ZGE can be compatible with a constant and stable employment rate if the sensitivity of productivity growth to capital accumulation and to the profit share are sufficiently high. Since no mechanism guarantees that the long run equilibrium is aligned with full employment, in a subsequent scenario we consider a working time reduction policy to guarantee a long run equilibrium aligned with full employment.