Institutional changes, effective demand, and inequality: a structuralist model of secular stagnation

Vinicius Curti Cicero () and Daniele Tavani
Additional contact information
Vinicius Curti Cicero: Department of Global Commerce, Denison University, USA

No 2506, Working Papers from New School for Social Research, Department of Economics

Abstract: This paper addresses the factors driving economic stagnation and inequality in the US over recent decades. We study a demand-driven model with joint adjustment of the functional distribution and capacity utilization in the short run, and explore the dynamics of wealth accumulation and labor productivity growth in the long run. Our analysis formally explains several stylized facts observed in the US economy in the neoliberal period: the decline in labor share of income, the increase in the top 1% wealth share, the slowdown in labor productivity growth, and the reduction in the income-capital ratio. Institutional changes that weakened workers’ bargaining power or strengthened firms’ market power have reduced the labor share of income. While these changes may have initially stimulated short-term economic activity and accumulation, their long-term effects are concerning. In particular, a lower labor share negatively impacts labor productivity growth and, in turn, slows down the growth rate of the economy in the long run. To achieve balanced growth, the rate of capacity utilization must eventually decrease. Importantly, our model’s long run boils down to a simple 2D dynamical system in the capitalist wealth share and the labor share of income. Our findings demonstrate that an institutionally-driven decline in the labor share exacerbates wealth inequality and ultimately depresses demand in the long run; and that taxation of capital gains can lower both wealth and income inequality. These results point to the importance of policies counterbalancing the labor-crushing developments of the past decades.

Keywords: Secular stagnation; income shares; wealth inequality; aggregate demand (search for similar items in EconPapers)
JEL-codes: D31 D33 E12 E21 E25 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2025-05
New Economics Papers: this item is included in nep-hme and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.economicpolicyresearch.org/econ/2025/NSSR_WP_062025.pdf First version, 2025 (application/pdf)

Related works:
Working Paper: Institutional changes, effective demand and inequality: a structuralist model of secular stagnation (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:new:wpaper:2506

Access Statistics for this paper

More papers in Working Papers from New School for Social Research, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Mark Setterfield ().