1. Endogenizing productivity in the Bhaduri-Marglin model
Final presentation
Endogenizing productivity in the Bhaduri-Marglin model
Bernhard Schütz
a.Univ.Prof. Dr. Martin Riese
WS 2008/09

2. Endogenizing productivity in the Bhaduri-Marglin model
Overview
What‘s the Bhaduri-Marglin model?
Why endogenous productivity?
Endogenous productivity in other post-Keynesian models
Endogenous productivity in the Bhaduri-Marglin model
Endogenizing productivity in the Bhaduri-Marglin model

3. The Bhaduri-Marglin model

4. The Bhaduri-Marglin model I
Focus: What‘s the influence of real wage restraint on output?
Lower real wages lead to:
Lower wage cost, which means higher profits  higher investment demand
Lower purchasing power  lower consumption demand
Endogenizing productivity in the Bhaduri-Marglin model

5. The Bhaduri-Marglin model II
Starting point:
Y = C + I  I = S
Investment: I = I(h,z)
h =  / Y...profit share
z = Y / Y*...capacity utilization
(…total profits, Y*...potential output)
Endogenizing productivity in the Bhaduri-Marglin model

6. The Bhaduri-Marglin model III
Saving:
Y*=1  S = shz
Profit share (h):
w...real wage rate
…labor productivity
Endogenizing productivity in the Bhaduri-Marglin model

7. The Bhaduri-Marglin model IV
Equilibrium condition: I(h,z) = shz
Total differentiation yields:
Endogenizing productivity in the Bhaduri-Marglin model

8. The Bhaduri-Marglin model V
Real wage restraint (increase in the profit share) leads to:
A rise in z if the responsiveness of investment (to a change in h) is strong
A fall in z if the responsiveness of investment (to a change in h) is weak
Endogenizing productivity in the Bhaduri-Marglin model

9. Endogenous productivity other in post-Keynesian growth models

10. Endogenous productivity other in post-Keynesian growth models:
Raghavendra (2006):
Hein (2004):
Cassetti (2003):
Naastepad (2006):
Bhaduri (2006):
Endogenizing productivity in the Bhaduri-Marglin model

11. Endogenous labor productivity in the Bhaduri-Marglin model

12. Endogenizing productivity in the Bhaduri-Marglin model
Prerequisite
Deriving with respect to w instead of h yields (no change in meaning): 
Endogenizing productivity in the Bhaduri-Marglin model

13. Economies of scale

14. Endogenizing productivity in the Bhaduri-Marglin model
Economies of scale I
Higher capacity utilization leads to higher labor productivity:
Productivity influences the profit share:
Endogenizing productivity in the Bhaduri-Marglin model

15. Endogenizing productivity in the Bhaduri-Marglin model
Economies of scale II
Result:
No change in the numerator
Can the denominator turn negative?
Endogenizing productivity in the Bhaduri-Marglin model

16. Endogenizing productivity in the Bhaduri-Marglin model
Economies of scale III
Keynesian stability condition must be valid:
This is equal to ,
which means that the denominator cannot turn negative for stability
reasons.
Endogenizing productivity in the Bhaduri-Marglin model

17. Endogenizing productivity in the Bhaduri-Marglin model
Economies of scale IV
Interpretation of the result:
dz/dw > 0 if
dz/dw < 0 if
dz/dw increases in the profit-led demand regime
dz/dw decreases in the wage-led demand regime
Endogenizing productivity in the Bhaduri-Marglin model

18. The wage-effect

19. Endogenizing productivity in the Bhaduri-Marglin model
The wage-effect I
Higher real wages increase productivity by
increasing the firm‘s incentive to invest into labor productivity raising techniques (Naastepad 2006)
eliminating less efficient firms from the market („Webb-effect“) (Lavoie 1992)
creating more motivated workers (efficiency wage theory) 
Effect on the profit share:
Endogenizing productivity in the Bhaduri-Marglin model

20. Endogenizing productivity in the Bhaduri-Marglin model
The wage-effect II
Result:
No change in the denominator
If < 1, the effect of real wage restraint on z is smaller than before, because the gain in profit share is smaller
If > 1, lower real wages cause a fall in the profit share. This means that dz/dw > 0 in the profit-led regime
Endogenizing productivity in the Bhaduri-Marglin model

21. Investment effect

22. Endogenizing productivity in the Bhaduri-Marglin model
Investment effect I
Firms try to gain advantage over each other by increasing their level of productivity. This leads to:
new methods of production
more technically advanced types of capital
The effect of the presence of more technically advanced capital is a rise in the aggregate level of labor productivity. If other firms want to apply the new techniques in the production process, they have to invest in new capital. 
Endogenizing productivity in the Bhaduri-Marglin model

23. Endogenizing productivity in the Bhaduri-Marglin model
Investment effect II
Result:
Additional negative term in the denominator:
Any negative (positive) effect of real wage restraint on z will be larger because of the additional negative (positive) effect of lower (higher) demand on investment (through labor productivity)
Additional positive term in the numerator:
Real wage restraint has an additional negative effect on investment (through its negative impact on labor productivity)
Endogenizing productivity in the Bhaduri-Marglin model

24. Endogenizing productivity in the Bhaduri-Marglin model
Investment effect III
Any effect of real wage restraint on capacity utilization will be bigger (because the denominator is smaller)
The possibility for real wage restraint to have a negative impact on capacity utilization increased (because of the additional positive term in the numerator)
Endogenizing productivity in the Bhaduri-Marglin model

25. Summary

26. Endogenizing productivity in the Bhaduri-Marglin model
Summary I
If only the influence of z on labor productivity is considered,
the condition from the original BM-model holds:
dz/dw > 0 if
changes in productivity influence the size of the effect, increasing it in a profit-led demand regime and decreasing it in a wage-led demand regime.
Endogenizing productivity in the Bhaduri-Marglin model

27. Endogenizing productivity in the Bhaduri-Marglin model
Summary II
If also an effect of the real wage rate on labor productivity is considered,
the condition from the original BM-model for dz/dw > 0
( ) remains only valid if < 1
the impact of real wage restraint on output is zero if = 1
the impact of real wage restraint on output is generally smaller if
< 1, because losses in productivity affect the profit share negatively
real wage restraint leads to a loss in z in a profit-led demand regime if > 1 because of the large drop in productivity
Endogenizing productivity in the Bhaduri-Marglin model

28. Endogenizing productivity in the Bhaduri-Marglin model
Summary III
If a positive impact of labor productivity on investment is taken into account,
any effect of real wage restraint on capacity utilization will be bigger in general
a negative impact of real wage restraint on capacity utilization becomes more likely
Endogenizing productivity in the Bhaduri-Marglin model

29. Endogenizing productivity in the Bhaduri-Marglin model
Conclusion
Real wage restraint and productivity influence the economy in many more ways than recognized in the Bhaduri-Marglin model.
That’s the reason why, by ignoring labor productivity in their analysis, Bhaduri and Marglin were too simplistic.
Endogenizing productivity in the Bhaduri-Marglin model

30. Thank you for your attention!