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

2. 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

3. 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

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

5. 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

6. 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

7. 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

8. 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

9. 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

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

11. 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

12. 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

13. 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

14. 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

15. 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

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

17. 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

18. 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

19. 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

20. 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