2018-06 Long-term shifts in demand and distribution in neo-Kaleckian and neo-Goodwinian models
Summary (2 min read)
INTRODUCTION
- The neo-Kaleckian branch of post-Keynesian economics emphasizes the multi-faceted relationships between the functional distribution of income and various indicators of macroeconomic performance, such as the rates of capital accumulation, capacity utilization, and economic growth (Hein 2014; Lavoie 2014).
- This chapter will argue that there is a logically coherent explanation for the paradox that an increased profit share has failed to bring about improved macro performance at medium-term horizons (across a few decades) in economies that have profit-led demand in the short run (that is, at business-cycle frequencies).
- I apply the wage-led versus profit-led distinction only to the slope of the aggregate demand relationship in the short run; I do not use it to characterize the behavior of the overall economic system or longer-term outcomes.
THEORETICAL FRAMEWORK
- Two stable cases that have (if the reader will pardon the pun) attracted much attention in the literature are the ones depicted in Figure 1.
- But as the raw data show – and the econometric estimates of Kiefer and Rada (2015) confirm – the equilibria in these figures have drifted in a southwesterly direction, that is, toward lower equilibrium levels of both utilization rates (measured by output gaps) and the wage share, in most of the advanced economies over the past few decades.
- With the AD curve sloping upward, a downward shift of the DC curve would naturally have led to reductions in the equilibrium levels of both the wage share and the utilization (or growth) rate, as shown by the shift of DC to DC′ in panel (a) of Figure 2.
- The cases depicted in the two panels of Figure 2 represent only two extreme possibilities, in which only one curve (AD or DC) shifts in the medium run; hence, either of these scenarios seems quite unlikely.
REEVALUATING THE EMPIRICAL EVIDENCE
- Kiefer and Rada (2015) modified the neo-Goodwinian model of Barbosa-Filho and Taylor (2006) to allow for long-term shifts in the equilibrium values of capacity utilization (measured by the output gap) and the wage share.
- In contrast, Stockhammer and Wildauer (2016) studied the drivers of aggregate demand for a panel of 18 OECD countries using a structural model with separate equations for consumption, investment, exports, and imports.
- Stockhammer (2013) found that decreasing wage shares in a panel of 71 countries (including both advanced and developing nations) were principally explained by variables representing financialization, globalization, and retrenchment of welfare states.
- The stricter are the inflation targeting policies (for example, the lower is the policy objective for inflation and the higher is the estimated “natural rate of unemployment”), the more aggregate demand will be chronically depressed, with negative effects on the wage share if the DC relationship exhibits a profit-squeeze.
- Indeed, the post-Keynesian literature often emphasizes the distributional impact of monetary policy, but mainly in relation to the distribution of capital income between rentiers and firms (see Rochon and Setterfield 2012).
CONCLUSIONS
- The findings of profit-led demand and neo-Goodwinian cyclical dynamics in some empirical studies have led to widespread skepticism of how such behavior could be compatible with the observed medium-term declines in both macro performance (utilization or growth rates) and wage shares in various countries.
- But since those findings pertain only to short-run, cyclical behavior, they are not necessarily inconsistent with the observed medium-term trends.
- This chapter has shown that profit-led demand and neo-Goodwinian cycles can potentially be reconciled with those trends, but only if there is a profit-squeeze in distribution and the shifts in the aggregate demand relationship dominate the shifts in the distributive relationship.
- It should be emphasized that this is only a logical possibility, and much more theoretical and empirical work is required to tease out the channels through which various kinds of structural forces and policy shifts have affected both income distribution and aggregate demand in the long term.
- Also, if Lavoie is correct that cyclical movements in the wage share are largely driven by endogenous fluctuations in labor productivity rather than by the behavior of the real wage, as the empirical results in Cauvel (2018) suggest, then all models that assume that the wage share is an adequate measure of distributional forces would have to be re-thought.
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References
33 citations
"2018-06 Long-term shifts in demand ..." refers background in this paper
...Lavoie (2014, 2017) argues that those findings could be driven by the procyclical behavior of labor productivity in the presence of overhead labor....
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30 citations
27 citations
"2018-06 Long-term shifts in demand ..." refers background in this paper
...In regard to consumption, Cynamon and Fazzari (2013) and Kim et al. (2015) have analyzed how financialization allows middle-class consumers to increase spending via debt accumulation in spite of stagnant earnings (or to maintain spending when earnings fall) in the short run, but these studies also emphasize that such debt-led household spending is unsustainable in the long run when consumption becomes constrained by increased debt burdens. Given that all these studies have focused on particular components of aggregate demand (consumption and/or investment), they are most likely identifying downward shifts in AD, but these same shifts could also have a positive or negative impact on the equilibrium wage share depending on the slope of DC. Another potential culprit for explaining a downward shift in AD is increasing wage inequality, for example, in the form of increasing wage gaps between professional-managerial labor and production workers. Palley (2017) shows theoretically that a redistribution of labor income away from wages of production workers and toward salaries of “capitalist-managers” (professional and managerial labor) can depress aggregate demand, regardless of whether demand is profit- or wage-led....
[...]
...In regard to consumption, Cynamon and Fazzari (2013) and Kim et al....
[...]
...In regard to consumption, Cynamon and Fazzari (2013) and Kim et al. (2015) have analyzed how financialization allows middle-class consumers to increase spending via debt accumulation in spite of stagnant earnings (or to maintain spending when earnings fall) in the short run, but these studies also emphasize that such debt-led household spending is unsustainable in the long run when consumption becomes constrained by increased debt burdens....
[...]
23 citations
"2018-06 Long-term shifts in demand ..." refers background in this paper
...Like other authors in this genre, Stockhammer and Wildauer treat the wage share as exogenous. A number of recent studies have tested for the drivers of falling wage shares. Stockhammer (2013) found that decreasing wage shares in a panel of 71 countries (including both advanced and developing nations) were principally explained by variables representing financialization, globalization, and retrenchment of welfare states....
[...]
22 citations
"2018-06 Long-term shifts in demand ..." refers background in this paper
...Also, this view allows for temporary booms in aggregate demand facilitated by asset-price bubbles and debt-driven spending in some countries, or export-led “mercantilist” expansions in others (Hein and Mundt 2013)....
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...1 For earlier surveys of the empirical literature, see Onaran and Galanis (2012) and Lavoie and Stockhammer (2013). 2 See also Kiefer and Rada (2015) and Carvalho and Rezai (2016)....
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Q2. What have the authors stated for future works in "Long-term shifts in demand and distribution in neo-kaleckian and neo-goodwinian models" ?
However, it should be emphasized that this is only a logical possibility, and much more theoretical and empirical work is required to tease out the channels through which various kinds of structural forces and policy shifts have affected both income distribution and aggregate demand in the long term. Thus, it is important for future research to focus on better understanding what determines the relative shares of wages and profits and analyzing the multidirectional causality between demand, distribution, and other factors over both short-run cycles and longer time horizons. Also, if Lavoie is correct that cyclical movements in the wage share are largely driven by endogenous fluctuations in labor productivity rather than by the behavior of the real wage, as the empirical results in Cauvel ( 2018 ) suggest, then all models that assume that the wage share is an adequate measure of distributional forces would have to be re-thought.