Wage-led demand as a rebalancing strategy for economic growth in China

Bruno Jetin and Luis Reyes Ortiz

Journal of Post Keynesian Economics, 2020, vol. 43, issue 3, 341-366

Abstract: Rebalancing growth in favor of domestic consumption has been an objective of Chinese policy makers for over two decades. However, until recently little progress has been achieved. This article argues that the nature of the demand regime is a major reason for the limited rebalancing operated thus far. Until the great recession (2008–09), Chinese growth was profit-led, which means that an increase in the profit share of income had a positive effect on investment and net exports that exceeded the negative effect on consumption. The fact that the profit share increased by 10 percentage points explains why the rate of growth boomed over the 1996–2007 period. We show that after the great recession, China’s demand regime turned wage-led, which means that an increase in the wage share results in a positive effect on households’ consumption which exceeds the negative effect on investment and net exports. The conclusion is that a pro-labor policy may now contribute to rebalance China’s growth and make it less dependent on exports, overinvestment and carbon-intensive industries.

Date: 2020
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Working Paper: Wage-led demand as a rebalancing strategy for economic growth in China (2019)
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DOI: 10.1080/01603477.2020.1774392

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