Wage-led Growth: Concept, Theories and Policies Marc Lavoie* and Engelbert Stockhammer**

RDW Conference, ILO, Geneva, 8 July 2011 Preliminary remarks The wage share has been falling in several countries over the last decades. There has been a polarization of incomes, even within wage and salary income. Average wages and average labour compensation have not kept up with productivity increases. Growth processes seem to have become more unbalanced. Export-led growth and finance-led growth regimes do not seem to be sustainable or stable. RDW Conference, ILO, Geneva, 8 July 2011

RDW Conference, ILO, Geneva, 8 July 2011 New perspectives on wages and economic growth: potentials of wage-led growth 1. Conceptual clarification 2. Why has the wage share been falling? 3. A mapping of wage-led and profit-led demand 4. A mapping of wage-led and profit-led supply 5. The impact of income polarization 6. The impact of financialization RDW Conference, ILO, Geneva, 8 July 2011

Distribution and growth. A conceptual framework RDW Conference, ILO, Geneva, 8 July 2011

The crucial distinction One has to distinguish between the policies that are being pursued in a country to promote a certain kind of growth regime; And the economic growth regime that this country is actually into, and hence how the economy will react to the policies being put forward. RDW Conference, ILO, Geneva, 8 July 2011

Pro-labour and pro-capital distributional policies Other factors Pro-capital Pro-labour Policies ’Labour market flexibility’ Abolish minimum wages Weaken collective bargaining Impose wage moderation ’Welfare state’ Increase minimum wages Strengthen collective bargaining Changes in technology Globalisation Financialization Results Weak wage growth Wage share ↓ Increased wage dispersion Rising real wages Stable (or ↑) wage share Decreased wage dispersion RDW Conference, ILO, Geneva, 8 July 2011

Definition of profit-led and wage-led economic regimes Overall impact on the economy Favourable Unfavourable Income distribution change imposed on society An increase in the profit share Profit-led regime Wage-led regime An increase in the wage share RDW Conference, ILO, Geneva, 8 July 2011

Viability of growth regimes Distributional policies Pro-capital Pro-labour Economic regime Profit-led Profit-led growth process Stagnation or unstable growth Wage-led Wage-led growth process RDW Conference, ILO, Geneva, 8 July 2011

Actual growth strategies Distributional policies and strategies Pro-capital Pro-labour Economic regime Profit-led ‘Trickle-down Neoliberalism’ – Supply-side policies will generate aggregate demand ‘Doomed social reforms’ TINA Wage-led ‘Neoliberalism in practice’ – Unstable and has to rely on exogenous growth drivers (credit-led growth, export-led growth) Postwar social Keynesianism Golden age RDW Conference, ILO, Geneva, 8 July 2011

RDW Conference, ILO, Geneva, 8 July 2011 Demand regimes RDW Conference, ILO, Geneva, 8 July 2011

Demand regimes, Y=C+I+NX+G An increase in the Wage Share leads to WS ↑ Effect on consumption (cw > cp) C ↑ Effect on investment I (↑) ↓ Domestic effect Effect on net exports NX ↓ Total effect Y ↓↑ RDW Conference, ILO, Geneva, 8 July 2011

Economic structure: wage-led and profit-led demand regimes Small differentials in propensities to consume Propensity out of wages is much higher than the propensity out of profits Investment is highly sensitive to profitability and accelerator parameter is low Investment is not sensitive to profitability and accelerator parameter is high Very open economy with high net export price elasticity Relatively closed economy with low net export price elasticity RDW Conference, ILO, Geneva, 8 July 2011

Effects of an increase in the wage share and demand regimes Effect on total demand (or the rate of capacity utilization) Positive Negative Effect on investment (or the rate of accumulation) Wage-led demand and wage-led investment Wage-led demand and profit-led investment Profit-led demand and profit-led investment RDW Conference, ILO, Geneva, 8 July 2011

RDW Conference, ILO, Geneva, 8 July 2011 Effects of an increase in the wage share in the canonical Kaleckian model I, S S0 S1 Ica E S00 = I0 I q0 qm qma q RDW Conference, ILO, Geneva, 8 July 2011

Effects of an increase in the wage share in the post-Kaleckian model I, S S0 S1 I1 Ica I2 I0 I0 q0 qm qma q RDW Conference, ILO, Geneva, 8 July 2011

Supply regimes: Effect on capital stock and productivity RDW Conference, ILO, Geneva, 8 July 2011

Economic structure: wage-led and profit-led productivity regimes Wage restraint leads to productivity-enhancing investment Higher real wage growth leads to slower productivity growth Wage led Wage growth has strong positive effects on labour effort and productivity–enhancing investments Higher real wage growth leads to faster productivity growth (Webb effect) RDW Conference, ILO, Geneva, 8 July 2011

Interaction between productivity and demand There is a lot of empirical evidence showing that faster overall growth, and faster growth in manufacturing, leads to faster productivity growth. This is the so-called Kaldor-Verdoorn effect Thus, the effects of an increase in wages or the wage share, besides their direct effect on productivity, will have an effect on aggregate demand that will have additional indirect effects on productivity. RDW Conference, ILO, Geneva, 8 July 2011

Total productivity effect of an increase in the wage share, when the partial productivity regime is wage led Demand Regime Direct (partial) productivity effect Indirect productivity effect (Kaldor-Verdoorn effect) Overall combined productivity and demand effect Profit led Positive Negative Positive or negative Wage led RDW Conference, ILO, Geneva, 8 July 2011

Conclusion: The danger of an error of composition Several countries wish to pursue an export-led, restraining wages to gain a competitive advantage. But at the level of the whole world, planet earth is a closed economy. All countries cannot be net exporters. Even the eurozone is a relatively closed area. Thus what really counts are the effects of an increase in the wage share on domestic aggregate demand. Empirical studies show that most countries are in a wage-led domestic demand regime. A wage-led growth strategy is thus conducive to the most sustainable growth process. RDW Conference, ILO, Geneva, 8 July 2011