Income Shares, Secular Stagnation, and the Long-Run Distribution of Wealth

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in ABSTRACTFour alarming stylized facts have characterized the recent economic history of the United States: (i) a fall in labor productivity; (ii) a fall in the labor share, (iii) an increase in the capital income ratio, and (iv) an increase in the wealth share owned by top income earners. In this paper, we offer a non-Neoclassical explanation for these facts that merges the Pasinetti (1962) approach to differential saving propensities among classes with the theory of induced technical change (ITC) by Kennedy (1964). First, we provide a simple microeconomic rationale for workers' saving propensity being lower than capitalists' based on the empiricallysupported argument that consumption peer effects are more prevalent at lower brackets of the income distribution (Petach and Tavani, 2018). We then show that institutional changes that lower the labor share -a decline in unionization, an increase in monopsony power in the labor market, the so-called 'race to the bottom' fostered by a hyper-competitive global environment, or the exhaustion of path-breaking scientific discoveries as argued by Gordon (2015) -can explain the decline in labor productivity growth because of the reduced incentives to innovate to save on labor costs. Combined with ITC, differential savings delivers a direct relationship between the capitalist share of wealth and the capital-income ratio independent of the elasticity of substitution between capital and labor. Finally, we argue that these tendencies are not inevitable: tax policy can be used to implement any wealth distribution, similarly to Zamparelli (2016); while worker-crushing institutional arrangements can be reversed through counteracting policy changes. However, both policy changes appear unlikely given the current institutional and global climate. Abstract Four alarming stylized facts have characterized the recent economic history of the United States: (i) a fall in labor productivity; (ii) a fall in the labor share, (iii) an increase in the capitalincome ratio, and (iv) an increase in the wealth share owned by top income earners. In this paper, we offer a non-Neoclassical explanation for these facts that merges the Pasinetti (1962) approach to differential saving propensities among classes with the theory of induced technical change (ITC) by Kennedy (1964). First, we provide a simple microeconomic rationale for workers' saving propensity being lower than capitalists' based on the empirically-supporte...

More age, less growth? Secular stagnation and societal ageing

“…Framing the slowing of growth across advanced economies as 'secular stagnation' has led to a number of hypotheses to account for the phenomenon. Each in turn highlights a different set of potential determinants, from those embedded within endogenous macroeconomic systems involving rates of savings, investment, interest and total factor productivity to those that seek an explanation couched in terms of 'external' structural factors, such as the effects of growing wealth and income inequalities, the dominance of capital versus labour in creating surplus, as well as demographic changes altering the ratio of production and consumption, savings and investment and labour productivity (Arsov and Ravimohan, 2020;Di Bucchiano, 2020;Eggertsson, Mehrotta and Robbins, 2019;Gordon, 2012;Michau, 2018;Petach and Tavani, 2020;Storm, 2017). Some have argued that underlying all these econometric formulations of secular stagnation is the old idea that the economy reflects a society's 'reproductive fitness' (Cooper, 2019;McClanahan, 2019).…”

Goodwin, Baumol & Lewis: How structural change can lead to inequality and stagnation

“…Since a ψ > 0, the steady state income-capital ratio increases in the labor share, which in turn is pinned down by the curvature of the innovation possibility frontier. Petach and Tavani (2020) build on this link to explain the "Piketty fact" of a rising capital-income ratio and a falling labor share in response to an adverse shock to labor market institutions. Though causal mechanisms focus tightly on technology, the theory does not require Humbug production functions.…”

“…Many collections of these stylized facts have been put together, and they are largely uncontroversial. For examples, see Petach and Tavani (2020, Figure 1, p . 237), Rada et al.…”

“…In such models, labor suppression can lead to secular stagnation in steady state even if the short run remains profit led. Petach and Tavani (2020) presents such an effort in a model that also includes dynamics of wealth distribution. The authors build on a micro‐founded Kennedy‐style framework, which requires the assumption that the exogenous shock affects the intercept of the innovation possibility frontier.…”

“…Petach and Tavani (2020) solve this problem by assuming that shocks to labor market institutions affect the steady state labor share and the intercept of a linearized innovation possibility frontier.…”