Wage share developments: shedding light on Kalecki's theory of functional income distribution

Luiz de Mello and Cyrille Schwellnus

Chapter 11 in Income Distribution, Economic Growth and Unemployment, 2025, pp 239-253 from Edward Elgar Publishing

Abstract: Functional income distribution is at the heart of Michal Kalecki's theory of the business cycle: firms’ pricing power on product markets and the relative bargaining strength of workers and capital owners determine the equilibrium wage share. This chapter analyses this proposition in light of wage share developments in OECD countries over the past 25 years. It finds strong support for the view that firms’ pricing power is a key determinant of equilibrium wage shares but little support for the view that policies generally considered as strengthening workers’ bargaining positions raise equilibrium wage shares. The chapter argues that Kalecki's theory does not account for the possibility of substitution of capital for labour, which may reduce the equilibrium wage share. The chapter provides evidence of capital–labour substitution in response to changes in relative factor prices, especially for low-skilled workers, suggesting that raising workers’ skills will be key to stabilising equilibrium wage shares.

Keywords: Wage Share; Kalecki; Functional Income Distribution (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035342556
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