Reconsidering the Dynamic Interaction between Real Wages and Macroeconomic Activity

Abstract

In this paper we investigate the role and the feedback structure of income distribution in the macro-dynamics of the U.S. economy after World War II. Among other things we analyze both theoretically and empirically the influence of job insiders on wage determination. Furthermore, by means of system GMM estimation we find empirical evidence of a negative dependence of the goods market dynamics on the development of functional income distribution in the U.S. economy.

Income distribution and economic activity: A frequency domain causal exploration

“…The first column reports the effect from x on ψ , that is, the profit squeeze as specified in the neo‐Goodwinian literature, which could be interpreted to emphasize “insider bargaining,” see Diallo et al. (2011) for related discussion. The second column reports the standard profit squeeze in the labor market.…”

“…A negative sign of this parameter signifies profit-led activity, and vice versa wage-led activity. In line with empirical evidence, we assume profit-led activity for the remainder of this section (Barbosa & Taylor, 2006;Barrales-Ruiz et al, 2022;Basu & Gautham, 2019;Diallo et al, 2011;Proaño et al, 2006). The relationship between employment rate and output gap follows Okun's law; see Tavani et al (2011) for related discussion.…”

“…A key feature of this literature is to model wage and price indices as state variables, and hence not model the labor share as state variable. Despite this, much of the associated empirical results confirm the profit‐led nature of macroeconomic activity, here as an adverse response of the goods market to higher real wages (Diallo et al., 2011; Proaño et al., 2006). Other research considers extensions without disaggregating the labor share.…”

“…An important question in such a 3D model is whether the profit led and profit squeeze results pertain to both employment rate and output gap, or only one of these (on this, see also Diallo et al., 2011). The theoretical priors detailed above imply that the profit squeeze is apparent most clearly vis‐à‐vis the employment rate, but that the profit led nature of activity manifests most strongly for the output gap.…”

Labour incomes and economic activity in Poland

“…There is no clear theoretical, broadly accepted paradigm that would provide well established judgements whether wages are too low or too high in economic terms (Diallo et al, 2011). In the economic theory there are concepts of both profit-led and wage-led growth.…”