Classical and Keynesian Models of Inequality and Stagnation

By Codrina Rada, Daniele Tavani, Rudiger von Arnim, Luca Zamparelli

PKES Working Paper 2225

November 2022

This paper studies two formal models of long run growth with a medium-run distributive cycle, both of which feature causal links from the rise in inequality to a deterioration of long run macroeconomic performance. Both versions feature an endogenous income-capital ratio: one through the Keynesian notion of effective demand, the other building on induced bias in technical change. A key focus of the analysis is on the assumptions necessary in both frameworks to generate policy implications consistent with the observed decline of the labor share, the income-capital ratio, and labor productivity growth during the neoliberal era. Importantly, both theories: (a) provide space for mutually reinforcing pro-labor and pro-growth policies in the long run, although they differ in the mechanisms at play in these processes; (b) imply a potential tradeoff between pro-labor policies and growth on one hand, and long-run employment on the other; (c) are consistent with the evidence on the distributive cycle at business cycle frequency.

Keywords: Distributive cycle, induced technical change, labor share, stagnation

JEL classification: E11 E12 E25 E32 O33 O41