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Wage-led Growth: Theory, Evidence, Policy

  • Engelbert Stockhammer
  • Özlem Onaran

The paper provides an overview of the concept of wage-led growth, both as an analytical concept and as an economic policy strategy. At the core of our analysis is the distinction between wage-led and profit-led demand regimes. The Kaleckian tradition in macroeconomics asserts that a higher wage share will have expansionary effects. Bhaduri and Marglin (1990) generalize the model by allowing for classical mechanisms. The paper presents a two-country short run model to clarify the key concepts surrounding a wage-led vs a profit-led demand regime. It distinguishes carefully between partial and total effects and it analyses demand regimes with respect to national as well as international changes in the wage share. We also review the empirical literature. Our reading is that the available evidence indicates that demand in most economies is domestically wage led. Changes in functional income distribution also have supply-side effects. Available evidence suggests that higher wage growth induces higher productivity growth. Neoliberalism resulted in an increase in inequality and a decline in the wage share, but growth has nowhere been based on the profit-led growth process. Rather neoliberalism has given rise to either debt-led or export-led growth regimes. The paper concludes by outlining a wage-led growth strategy and by discussing its limitations.

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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp300.

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Date of creation: 2012
Handle: RePEc:uma:periwp:wp300
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  1. repec:dau:papers:123456789/10091 is not listed on IDEAS
  2. Stockhammer, Engelbert & Onaran, Ozlem, 2004. "Accumulation, distribution and employment: a structural VAR approach to a Kaleckian macro model," Structural Change and Economic Dynamics, Elsevier, vol. 15(4), pages 421-447, December.
  3. Engelbert Stockhammer, 2011. "Wage norms, capital accumulation, and unemployment: a post-Keynesian view," Oxford Review of Economic Policy, Oxford University Press, vol. 27(2), pages 295-311.
  4. Arjun Jayadev, 2007. "Capital account openness and the labour share of income," Cambridge Journal of Economics, Oxford University Press, vol. 31(3), pages 423-443, May.
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  8. Jeronim Capaldo and Alex Izurieta, 2012. "The Imprudence of Labour Market Flexibilization in a Fiscally Austere World," Working Papers 112, United Nations, Department of Economics and Social Affairs.
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  10. Hein, Eckhard & Truger, Achim, 2010. "Finance-dominated capitalism in crisis – the case for a Global Keynesian New Deal," MPRA Paper 21175, University Library of Munich, Germany.
  11. Engelbert Stockhammer & Eckhard Hein & Lucas Grafl, 2007. "Globalization and the effects of changes in functional income distribution on aggregate demand in Germany," Department of Economics Working Papers wuwp114, Vienna University of Economics and Business, Department of Economics.
  12. Aghion, Philippe & Caroli, Eve & García-Peñalosa, Cecilia, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Scholarly Articles 12502063, Harvard University Department of Economics.
  13. Ozlem Onaran, 2011. "From wage suppression to sovereign debt crisis in Western Europe: who pays for the costs of the crisis?," International Journal of Public Policy, Inderscience Enterprises Ltd, vol. 7(1/2/3), pages 51-69.
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  16. Raghuram G. Rajan, 2010. "Fault Lines: How Hidden Fractures Still Threaten the World Economy," Economics Books, Princeton University Press, edition 1, number 9111.
  17. Adalmir Marquetti, 2004. "Do Rising Real Wages Increase The Rate Of Labor-Saving Technical Change? Some Econometric Evidence," Metroeconomica, Wiley Blackwell, vol. 55(4), pages 432-441, November.
  18. Marc Lavoie, 2003. "Real Wages and Unemployment with Effective and Notional Demand for Labor," Review of Radical Political Economics, Union for Radical Political Economics, vol. 35(2), pages 166-182, June.
  19. Anthony Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Post-Print halshs-00754557, HAL.
  20. Taylor, Lance, 1985. "A Stagnationist Model of Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 9(4), pages 383-403, December.
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  22. Engelbert Stockhammer & Özlem Onaran & Stefan Ederer, 2009. "Functional income distribution and aggregate demand in the Euro area," Cambridge Journal of Economics, Oxford University Press, vol. 33(1), pages 139-159, January.
  23. Blecker, Robert A, 1989. "International Competition, Income Distribution and Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 13(3), pages 395-412, September.
  24. repec:ilo:ilowps:470932 is not listed on IDEAS
  25. Engelbert Stockhammer & Stefan Ederer, 2008. "Demand effects of the falling wage share in Austria," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 35(5), pages 481-502, December.
  26. Engelbert Stockhammer, 2012. "Rising Inequality as a Root Cause of the Present Crisis," Working Papers wp282, Political Economy Research Institute, University of Massachusetts at Amherst.
  27. Armon Rezai, 2011. "The Political Economy Implications of General Equilibrium Analysis in Open Economy Macro Models," Working Papers 1111, New School for Social Research, Department of Economics.
  28. Amitava Krishna Dutt, 2006. "Maturity, Stagnation And Consumer Debt: A Steindlian Approach," Metroeconomica, Wiley Blackwell, vol. 57(3), pages 339-364, 07.
  29. Dutt, Amitava Krishna, 1984. "Stagnation, Income Distribution and Monopoly Power," Cambridge Journal of Economics, Oxford University Press, vol. 8(1), pages 25-40, March.
  30. Engelbert Stockhammer & Robert Stehrer, 2009. "Goodwin or Kalecki in Demand? Functional Income Distribution and Aggregate Demand in the Short Run," Working Papers wp203, Political Economy Research Institute, University of Massachusetts at Amherst.
  31. Rudiger von Arnim & Daniele Tavani & Laura Barbosa de Carvalho, 2012. "Globalization as coordination failure: A Keynesian perspective," Working Papers 1202, New School for Social Research, Department of Economics.
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  34. Wolfgang F. Stolper & Paul A. Samuelson, 1941. "Protection and Real Wages," Review of Economic Studies, Oxford University Press, vol. 9(1), pages 58-73.
  35. Eckhard Hein & Lena Vogel, 2008. "Distribution and growth reconsidered: empirical results for six OECD countries," Cambridge Journal of Economics, Oxford University Press, vol. 32(3), pages 479-511, May.
  36. Robert A. Blecker, 2010. "Open economy models of distribution and growth," Working Papers 2010-03, American University, Department of Economics.
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