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Wage-led growth in the EU15 member-states: the effects of income distribution on growth, investment, trade balance and inflation

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Listed:
  • Ozlem Onaran
  • Thomas Obst

Abstract

This paper estimates a multi-country demand-led growth model for the EU15. A decrease in the share of wages in national income in isolation leads to lower growth in Finland, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom, whereas it stimulates growth in Austria, Belgium, Denmark and Ireland. However, a simultaneous decline in the wage share leads to an overall decline in EU15 GDP; hence, the EU15 as a whole is a wage-led economy. Furthermore, Austria and Ireland also experience a decline in growth when they decrease their wage share along with their trading partners. The results indicate that the decline in the wage share had significant negative effects on growth in the EU15 and supports the case for wage coordination. We present different wage-led recovery scenarios and the effects on prices, investment and net exports.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:cambje:v:40:y:2016:i:6:p:1517-1551.
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    File URL: http://hdl.handle.net/10.1093/cje/bew009
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    Cited by:

    1. Camille Logeay & Heike Joebges, 2018. "Could a national wage rule stabilize the current account and functional income distribution in the Euro area?," FMM Working Paper 23-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    2. Stefan Ederer & Miriam Rehm, 2017. "Will wealth become more concentrated in Europe?," FMM Working Paper 13-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Özlem Onaran, 2016. "Secular stagnation and progressive economic policy alternatives," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 13(2), pages 229-240, September.
    4. Marwil J. Dávila-Fernández & Serena Sordi, 2017. "Distributive cycles and endogenous technical change in a BoPC growth model," Department of Economics University of Siena 760, Department of Economics, University of Siena.
    5. repec:taf:jhudca:v:17:y:2016:i:3:p:434-439 is not listed on IDEAS
    6. repec:mes:postke:v:40:y:2017:i:2:p:223-238 is not listed on IDEAS
    7. repec:elg:ejeepi:v:14:y:2017:i:2:p131-172 is not listed on IDEAS
    8. Baccaro, Lucio & Howell, Chris, 2017. "Unhinged: Industrial relations liberalization and capitalist instability," MPIfG Discussion Paper 17/19, Max Planck Institute for the Study of Societies.
    9. repec:taf:irapec:v:31:y:2017:i:5:p:565-584 is not listed on IDEAS
    10. 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.
    11. Robert Jump & Ivan Mendieta-Muñoz, 2017. "Wage led aggregate demand in the United Kingdom," International Review of Applied Economics, Taylor & Francis Journals, vol. 31(5), pages 565-584, September.
    12. Nishi, Hiroshi, 2018. "A Dynamic Analysis of Demand and Productivity Growth in a Two-sector Kaleckian Model," MPRA Paper 86778, University Library of Munich, Germany.
    13. Marwil J. Dávila-Fernández & Serena Sordi, 2018. "Path dependence, distributive cycles and export capacity in a BoPC growth model," Department of Economics University of Siena 785, Department of Economics, University of Siena.
    14. Onaran, Özlem & Guschanski, Alexander, 2018. "The causes of falling wage share: sectoral and firm level evidence from developed and developing countries – what have we learned?," Greenwich Papers in Political Economy 19373, University of Greenwich, Greenwich Political Economy Research Centre.
    15. Won Jun Nah & Marc Lavoie, 2017. "Long-run convergence in a neo-Kaleckian open-economy model with autonomous export growth," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 40(2), pages 223-238, April.
    16. Oyvat, Cem & Öztunalı, Oğuz & Elgin, Ceyhun, 2018. "Wage-led vs. profit-led growth: a comprehensive empirical analysis," Greenwich Papers in Political Economy 20951, University of Greenwich, Greenwich Political Economy Research Centre.
    17. Alberto Botta & Eugenio Caversazi & Daniele Tori, 2016. "The macroeconomics of shadow banking," Working Papers PKWP1611, Post Keynesian Economics Society (PKES).
    18. Prante, Franz J., 2017. "Macroeconomic effects of personal and functional income inequality: Theory and empirical evidence for the US and Germany," IPE Working Papers 83/2017, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    19. Eckhard Hein & Eckhard Achim Truger, 2017. "Opportunities and limits of rebalancing the Eurozone via wage policies," FMM Working Paper 06-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    20. No authors listed, 2017. "Will Wealth Become More Concentrated in Europe?," Working Paper Reihe der AK Wien - Materialien zu Wirtschaft und Gesellschaft 172, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik.
    21. Caiani, Alessandro & Russo, Alberto & Gallegati, Mauro, 2017. "Are higher wages good for business? An assessment under alternative innovation and investment scenarios," MPRA Paper 80439, University Library of Munich, Germany.
    22. Heinze, Henriette, 2018. "The determinants of German exports: An analysis of intra- and extra-EMU trade," IPE Working Papers 95/2018, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    23. repec:spr:eurase:v:7:y:2017:i:1:d:10.1007_s40822-016-0061-x is not listed on IDEAS
    24. 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.

    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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