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PKSG Working Paper Series

Working Paper PKWP1603

Wage- versus profit-led growth in the context of international interactions and public spending: The political aspects of wage-led recovery

February 2016

Özlem Onaran

This paper presents the empirical evidence about the impact of the simultaneous race to the bottom in labour’s share on growth after taking global interactions into account based on the Post-Kaleckian theoretical framework developed by Bhaduri and Marglin (1990). The world economy and large economic areas are likely to be wage-led; and parameter shifts in different periods are unlikely to make a difference in this finding. The effects that can come from a wage-led recovery on growth and hence employment are positive, however they are also modest in magnitude. We then present an alternative scenario based on a policy mix of wage increases and public investment. A coordinated mix of policies in the G20 targeted to increase the share of wages in GDP by 1%-5% in the next 5 years and to raise public investment in social and physical infrastructure by 1% of GDP in each country can create up to 5.84% more growth in G20 countries. The final section addresses the political aspects and barriers to a wage-led recovery.

Keywords: wage share, wage-led growth, globalization, public investment

JEL classification: E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian E22: Investment; Capital; Intangible Capital; Capacity E25: Aggregate Factor Income Distribution

Download: Working Paper PKWP1603