Is aggregate demand wage-led or profit-led? National and global effects

Ozlem Onaran and Giorgos Galanis

No 15289, Greenwich Papers in Political Economy from University of Greenwich, Greenwich Political Economy Research Centre

Abstract: This paper estimates the effects of a change in the wage share on growth in the G20 countries using a post-Keynesian/post-Kaleckian model, analyses the interactions among different economies, and calculates the global multiplier effects of a simultaneous decline in the wage share. At the national level, a decrease in the wage share leads to lower growth in the euro area, Germany, France, Italy, UK, US, Japan, Turkey, and Korea, i.e. these economies are wage-led, whereas it stimulates growth in Canada, Australia, Argentina, Mexico, China, India, and South Africa; thus the latter group of countries are profit-led. However, a simultaneous decline in the wage share in all these countries leads to a decline in global growth. Furthermore, Canada, Argentina, Mexico, and India also contract when they decrease their wage-share along with their trading partners. Thus the global economy in aggregate is wage-led. The policy conclusions of the paper shed light on the limits of strategies of international competitiveness based on wage competition in a highly integrated global economy, and point at the possibilities to correct global imbalances via coordinated macroeconomic and wage policy, where domestic demand plays an important role. There is room for a wage-led recovery in the global economy based on a simultaneous increase in the wage shares, where global GDP as well as all individual countries can grow.

Keywords: wage share; growth; global multiplier; consumption; investment; exports; imports; G20; developed and developing countries (search for similar items in EconPapers)
Date: 2012-10-30
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Citations: View citations in EconPapers (76)

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Working Paper: Is aggregate demand wage-led or profit-led? National and global effects (2012)
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