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Capitalists, Workers, and Managers: Wage Inequality and Effective Demand

Listed author(s):
  • Daniele Tavani

    ()

    (Department of Economics, Colorado State University)

  • Ramaa Vasudevan

    ()

    (Department of Economics, Colorado State University)

We present a simple three-class model in the Kaleckian tradition to investigate the implications of a dominant managerial class class for the dynamics of demand and distribution. Managers are hired by capitalists to supervise workers, but supervision results in surplus extraction and wage inequality. The adjust- ment of capacity utilization to accommodate goods market disequilibrium produces two distinct regimes with respect to the responsiveness of investment demand to profitability: a low investment–response regime, where effective demand is both wage–led and inequality–led; and a high investment–response regime, where demand is profit–led. In accordance with recent empirical evidence for the US, we then introduce distributive dynamics that hinge on inequality squeezing workers’ wage growth. We find that the low investment–responsiveness regime produces a stable demand–distribution equilibrium only if the wage squeeze effect is relatively small. On the other hand, an equilibrium in the high investment–response regime is saddle–path stable. The main distributional implication of the wage squeeze produced by inequality is that the effect of redistribution toward workers in both the low-investment response regime and and the high investment response regime leads to declining inequality and capacity utilization. Hence, in both regimes, the inequality–led character of the equilibrium overcomes the stagnationist or exhilarationist features of effective demand. These findings imply that distributive dynamics lead to a stronger basis for cohesion in the interests of managers and capitalists compared to workers and managers.

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File URL: http://www.economicpolicyresearch.org/econ/2012/NSSR_WP_072012.pdf
File Function: First version, 2012
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Paper provided by New School for Social Research, Department of Economics in its series Working Papers with number 1207.

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Length: 18 pages
Date of creation: Nov 2012
Handle: RePEc:new:wpaper:1207
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  1. Harvie, David, 2000. "Testing Goodwin: Growth Cycles in Ten OECD Countries," Cambridge Journal of Economics, Oxford University Press, vol. 24(3), pages 349-376, May.
  2. Thomas Piketty & Emmanuel Saez, 2006. "The Evolution of Top Incomes: A Historical and International Perspective," American Economic Review, American Economic Association, vol. 96(2), pages 200-205, May.
  3. Galbraith, James K., 2012. "Inequality and Instability: A Study of the World Economy Just Before the Great Crisis," OUP Catalogue, Oxford University Press, number 9780199855650, April.
  4. Simon Mohun, 2005. "On measuring the wealth of nations: the US economy, 1964–2001," Cambridge Journal of Economics, Oxford University Press, vol. 29(5), pages 799-815, September.
  5. Simon Mohun, 2006. "Distributive shares in the US economy, 1964--2001," Cambridge Journal of Economics, Oxford University Press, vol. 30(3), pages 347-370, May.
  6. A. B. Atkinson & S. Voitchovsky, 2011. "The Distribution of Top Earnings in the UK since the Second World War," Economica, London School of Economics and Political Science, vol. 78(311), pages 440-459, 07.
  7. Simon Mohun, 2014. "Unproductive Labor in the U.S. Economy 1964-20101," Review of Radical Political Economics, Union for Radical Political Economics, vol. 46(3), pages 355-379, September.
  8. Laura Carvalho & Armon Rezai, 2016. "Personal income inequality and aggregate demand," Cambridge Journal of Economics, Oxford University Press, vol. 40(2), pages 491-505.
  9. Nelson H. Barbosa-Filho & Lance Taylor, 2006. "Distributive And Demand Cycles In The Us Economy-A Structuralist Goodwin Model," Metroeconomica, Wiley Blackwell, vol. 57(3), pages 389-411, 07.
  10. Dean M. Maki & Michael G. Palumbo, 2001. "Disentangling the wealth effect: a cohort analysis of household saving in the 1990s," Finance and Economics Discussion Series 2001-21, Board of Governors of the Federal Reserve System (U.S.).
  11. Daniele Tavani & Peter Flaschel & Lance Taylor, 2011. "Estimated non-linearities and multiple equilibria in a model of distributive-demand cycles," International Review of Applied Economics, Taylor & Francis Journals, vol. 25(5), pages 519-538, October.
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