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Wage and Profit-led Growth: The Limits to Neo-Kaleckian Models and a Kaldorian Proposal

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  • Esteban Perez Caldentey
  • Matias Vernengo

Abstract

We argue that a fundamental difference between Post-Keynesian approaches to economic growth lies in their treatment of investment. Kaleckian-Robinsonian models postulate an investment function dependent on the accelerator and profitability. Some of these models rely on the importance of profitability, captured by the profit share, to make the case for profit-led growth. For their part, Kaldorian models place the emphasis on the accelerator. More important, investment is a derived demand; that is, it is ruled by the adjustment of capacity to exogenous demand, which, in turn, determines the normal level of capacity utilization. In our view, the Kaldorian approach is better equipped to deal with some of the issues relating income distribution to accumulation with effective demand in the long run. We develop a Kaldorian open-economy model to examine the conditions under which an increase in real wages can produce profit or wage-led growth, showing that the limit to a wage-led expansion is a binding external constraint. The role and limitations of wages as a determinant of growth are further examined through spectral techniques and cycle analysis for a subset of developed economies. The evidence indicates that real wages are positively related to growth, investment, and capacity utilization. It also highlights the role of finance in sustaining expansions, suggesting that debt-led growth should not be identified with profit-led growth.

Suggested Citation

  • Esteban Perez Caldentey & Matias Vernengo, 2013. "Wage and Profit-led Growth: The Limits to Neo-Kaleckian Models and a Kaldorian Proposal," Economics Working Paper Archive wp_775, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_775
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Riccardo Pariboni, 2015. "Autonomous demand and the Marglin-Bhaduri model: a critical note," Department of Economics University of Siena 715, Department of Economics, University of Siena.
    3. repec:spr:eurase:v:7:y:2017:i:1:d:10.1007_s40822-016-0061-x is not listed on IDEAS
    4. Robert A. Blecker, 2015. "Wage-led Versus Profit-led Demand Regimes: The Long and Short of It," Working Papers 2015-05, American University, Department of Economics.
    5. Ahmad A. Borazan, 2015. "On the Way to the Great Depression, The Demand Regime of the US Economy (1900-1929)," Working Paper Series, Department of Economics, University of Utah 2015_02, University of Utah, Department of Economics.
    6. Alarco Tosoni, Germán, 2014. "Wage share and economic growth in Latin America, 1950-2011," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    7. Rudiger von Arnim & Jose Barrales, 2015. "Demand-driven Goodwin cycles with Kaldorian and Kaleckian features," Review of Keynesian Economics, Edward Elgar Publishing, vol. 3(3), pages 351-373, July.

    More about this item

    Keywords

    Kaldorian and Kaleckian Models; Profit-; Wage-; and Debt-Led Growth; Investment; Derived Demand; External Constraint;

    JEL classification:

    • B50 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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