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Institutional changes, effective demand, and inequality: a structuralist model of secular stagnation

Author

Listed:
  • Vinicius Curti Cicero

    (Department of Global Commerce, Denison University, USA)

  • Daniele Tavani

    (Department of Economics, Colorado State University)

Abstract

This paper addresses the factors driving economic stagnation and inequality in the US over recent decades. We study a demand-driven model with joint adjustment of the functional distribution and capacity utilization in the short run, and explore the dynamics of wealth accumulation and labor productivity growth in the long run. Our analysis formally explains several stylized facts observed in the US economy in the neoliberal period: the decline in labor share of income, the increase in the top 1% wealth share, the slowdown in labor productivity growth, and the reduction in the income-capital ratio. Institutional changes that weakened workers’ bargaining power or strengthened firms’ market power have reduced the labor share of income. While these changes may have initially stimulated short-term economic activity and accumulation, their long-term effects are concerning. In particular, a lower labor share negatively impacts labor productivity growth and, in turn, slows down the growth rate of the economy in the long run. To achieve balanced growth, the rate of capacity utilization must eventually decrease. Importantly, our model’s long run boils down to a simple 2D dynamical system in the capitalist wealth share and the labor share of income. Our findings demonstrate that an institutionally-driven decline in the labor share exacerbates wealth inequality and ultimately depresses demand in the long run; and that taxation of capital gains can lower both wealth and income inequality. These results point to the importance of policies counterbalancing the labor-crushing developments of the past decades.

Suggested Citation

  • Vinicius Curti Cicero & Daniele Tavani, 2025. "Institutional changes, effective demand, and inequality: a structuralist model of secular stagnation," Working Papers 2506, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:2506
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    More about this item

    Keywords

    Secular stagnation; income shares; wealth inequality; aggregate demand;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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