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Wage-led vs. profit-led growth: a comprehensive empirical analysis

Author

Listed:
  • Oyvat, Cem
  • Öztunalı, Oğuz
  • Elgin, Ceyhun

Abstract

This study investigates the impact of various economic factors in determining the relationship between functional income distribution and economic growth. Inspired by the seminal paper of Bhaduri and Marglin (1990), we base our analysis on a demand-driven distribution and growth model for an open economy that allows for either profit-led or wage-led growth. To this end, we use a cross-country panel dataset consisting of 41 countries from 1961 to 2011. In the first step of the empirical analysis, we first estimate whether growth regime is wage-led or profit-led in each country. Next, in the second step, using probit and meta-regression approaches with cross-country data, we analyse the effects of various macroeconomic variables on the nature of economic growth. Our results strongly reflect that a higher level of trade openness is associated with a lower probability of being wage-led. Moreover, we find evidence that lower wage inequality would make an economy more wage-led and that countries with a greater private credit-to-GDP ratio are more likely to be profit-led.

Suggested Citation

  • 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.
    • Handle: RePEc:gpe:wpaper:20951
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    File URL: http://gala.gre.ac.uk/id/eprint/20951/7/20951%20Oyvat%20Elgin%20and%20Oztunal%C4%B1_GreenwichPapersPoliticalEconomy_FEPS%20v3.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Distribution; demand; economic growth; trade openness; Keynesian economics;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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