A Very Short Explanation of Profit- versus Wage-led Growth

By David M. Fields

A central concern in Left (Post)-Keynesian heterodox macroeconomics is the interaction between economic activity and the distribution of the income that is generated. The problematic deals with the quandary on whether rising wage-shares bolster demand and increases the rate of capacity utilization, which, in turn, induces capitalists to invest, or that rises in the profit share serve as the primary stimulus to economic growth. Put differently, the subject deals with the distinction between profit- and wage-led growth (Bhaduri and Marglin, 1990; Vernengo and Rochon, 2001).

A large body of work has investigated the issue empirically (cf. Stockhammer and Onaran, 2013; Barbosa-Filho and Taylor, 2006; Hein and Vogel, 2008; Stockhammer et al, 2009), yet the primary theoretical difference lies in the treatment of capitalist investment. Wage-led growth models, inspired by the contributions of Nicholas Kaldor, estimate the degree to which capitalist investment is derived demand attuned to the growth of autonomous demand. In contrast, profit-led models, influenced by the work of Joan Robinson, gauge to determine the extent to which capitalist investment is an independent function subordinate to the rate of profit. In this sense, changes in income distribution have ambiguous effects on capital accumulation, which ultimately rests on the exact specification of the investment function in relation to an approximate remunerated risk, i.e. a normal rate of profit, of employing capital productively.

References:

Barbosa-Filho, Nelson H. and Lance Taylor. 2006. “Distributive and Demand Cycles in the US Economy—a Structuralist Goodwin Model.” Metroeconomica 57(3):389–411.

Bhaduri, Amit and Stephen Marglin. 1990. “Unemployment and the Real Wage: The Economic Basis for Contesting Political Ideologies.” Cambridge Journal of Economics 14(4):375–93.

Hein, Eckhard and Lena Vogel. 2008. “Distribution and Growth Reconsidered: Empirical Results for Six OECD Countries.” Cambridge Journal of Economics 32(3):479–511.

Stockhammer, Engelbert and Özlem Onaran. 2004. “Accumulation, Distribution and Employment: A Structural VAR Approach to a Kaleckian Macro Model.” Structural Change and Economic Dynamics 15(4):421–47.

Stockhammer, Engelbert and Ozlem Onaran. 2013. “Wage-Led Growth: Theory, Evidence, Policy.” Review of Keynesian Economics 1(1):61–78.

Stockhammer, Engelbert, Özlem Onaran, and Stefan Ederer. 2009. “Functional Income Distribution and Aggregate Demand in the Euro Area.” Cambridge Journal of Economics 33(1):139–59.

Vernengo, Matias and Louis-Philippe Rochon. 2001. “Kaldor and Robinson on Money and Growth.” The European Journal of the History of Economic Thought 8(1):75–103.