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Capitalists, Workers, and Managers: Wage Inequality and Effective Demand

Daniele Tavani and Ramaa Vasudevan ()

No 1207, Working Papers from New School for Social Research, Department of Economics

Abstract: We present a simple three-class model in the Kaleckian tradition to investigate the implications of a dominant managerial class class for the dynamics of demand and distribution. Managers are hired by capitalists to supervise workers, but supervision results in surplus extraction and wage inequality. The adjust- ment of capacity utilization to accommodate goods market disequilibrium produces two distinct regimes with respect to the responsiveness of investment demand to profitability: a low investment–response regime, where effective demand is both wage–led and inequality–led; and a high investment–response regime, where demand is profit–led. In accordance with recent empirical evidence for the US, we then introduce distributive dynamics that hinge on inequality squeezing workers’ wage growth. We find that the low investment–responsiveness regime produces a stable demand–distribution equilibrium only if the wage squeeze effect is relatively small. On the other hand, an equilibrium in the high investment–response regime is saddle–path stable. The main distributional implication of the wage squeeze produced by inequality is that the effect of redistribution toward workers in both the low-investment response regime and and the high investment response regime leads to declining inequality and capacity utilization. Hence, in both regimes, the inequality–led character of the equilibrium overcomes the stagnationist or exhilarationist features of effective demand. These findings imply that distributive dynamics lead to a stronger basis for cohesion in the interests of managers and capitalists compared to workers and managers.

Keywords: Effective Demand; Capacity Utilization; Wage Inequality; Stability (search for similar items in EconPapers)
JEL-codes: E12 E22 E25 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2012-11
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Journal Article: Capitalists, workers, and managers: Wage inequality and effective demand (2014) Downloads
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