The New Normal: Demand, Secular Stagnation and the Vanishing Middle-Class

Permanent scars: The effects of wages on productivity

“…18 With the prominent role it assigns to the dynamics of aggregate demand and wages as determinants of productivity, the classical-Keynesian approach may offer, in our view, some answers to the productivity puzzle of the recent decades. The role of long-run changes in demand in affecting productivity growth, especially in reference to the Kaldor-Verdoorn effect, has been confirmed in much empirical research (see for example Deleidi et al, 2020;Fazzari et al, 2020;Girardi et al, 2020) 19 ; while the role of wage dynamics has been especially treated in models assuming that low wage growth slows the growth of aggregate demand, thus affecting negatively productivity through an indirect channel (Storm, 2017(Storm, , 2019. The diffusion of low-wage jobs in the US economy has also given rise to interpretations, among critical economists, that focus on the changing structure of the economy (see for example Storm, 2017Storm, , 2019Taylor & Ömer, 2020).…”

“…The role of long-run changes in demand in affecting productivity growth, especially in reference to the Kaldor-Verdoorn effect, has been confirmed in much empirical research (see for example Deleidi et al, 2020;Fazzari et al, 2020;Girardi et al, 2020) 19 ; while the role of wage dynamics has been especially treated in models assuming that low wage growth slows the growth of aggregate demand, thus affecting negatively productivity through an indirect channel (Storm, 2017(Storm, , 2019. The diffusion of low-wage jobs in the US economy has also given rise to interpretations, among critical economists, that focus on the changing structure of the economy (see for example Storm, 2017Storm, , 2019Taylor & Ömer, 2020). The productivity slowdown would be associated, according to such interpretations, to the growing 'dualism' or polarization between on the one hand low-wage and low-productivity sectors (like food preparation, healthcare and the like), and on the other hand high-productivity and high-wage sectors (like manufacturing).…”

“…In the first place, we have concluded that the structural change hypothesis may explain only a small part of the changes in productivity of the last 3 decades, while forces operating within the sectors have had a much more important role in determining the trend of productivity as well as that of wages. 30 This does not amount to excluding, in our opinion, that the US economy has undergone important transformations in recent times, including the growing polarization between high-productivity/highwage productions and low-productivity/low-wage productions so often underlined in the literature (Lazonick, 2015;Storm, 2017;Taylor & Ömer, 2020). Rather, our results induce us to suppose that such kinds of changes have happened also through a reallocation of employment and production within the sectors themselves, between firms operating with different business models, as envisaged in the theoretical analysis we have illustrated in Section 2 (see particularly the 'organization' effect of wages described in Section 2.2).…”

“…Recent literature on the demand-led growth approach has emphasized two-not necessarily opposing-explanations of the productivity slowdown. The first one (Storm, 2017(Storm, , 2019Taylor & Ömer, 2020) focuses on structural factors, that is, on the growing weight, in the production mix of advanced economies in the last decades, of low-productivity sectors at the expense of high-productivity and high-wage sectors (like manufacturing). Structural change implies an aggregate distributional shift against wages, which also adversely react on the growth of aggregate demand.…”

“…Structural change implies an aggregate distributional shift against wages, which also adversely react on the growth of aggregate demand. The second explanation (see for example Deleidi et al., 2020; Fazzari et al., 2020; Storm, 2017; Storm, 2019) emphasizes the endogeneity of productivity growth in relation to the growth of aggregate demand. Endogeneity is primarily analyzed through the so‐called ‘Kaldor‐Verdoorn effect’, which postulates a dependence of productivity growth on the growth of output through the action of induced technical progress that generates dynamic increasing returns.…”