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

Vinicius Cicero and Daniele Tavani

No PKWP2410, Working Papers from Post Keynesian Economics Society (PKES)

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: 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 growth within a profit-led demand regime, 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 income-capital ratio, proxied by the rate of capacity utilization, must eventually decrease. The long-run behavior of our model is captured by a simple 2D dynamical system analyzing the capitalist wealth share and the labor share. Our findings demonstrate that an institutionally driven decline in the labor share exacerbates wealth inequality over time. These results point to the importance of policies counterbalancing the labor-crushing developments of the past decades to escape the process of stagnation and inequality.

Keywords: Secular stagnation; income shares; wealth inequality; aggregate demand (search for similar items in EconPapers)
Pages: 31
Date: 2024-06
New Economics Papers: this item is included in nep-hme and nep-pke
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