Wage-led growth in the EU15 member-states: the effects of income distribution on growth, investment, trade balance and inflation

Abstract

This paper estimates a multi-country demand-led growth model for EU15 countries. A decrease in the share of wages in national income in isolation leads to lower growth in Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom, whereas it stimulates growth in Austria, Belgium, Denmark and Ireland. However, a simultaneous decline in the wage share leads to an overall decline in EU15 GDP; hence EU15 as a whole is a wage-led economy. Furthermore, Austria and Ireland also experience negative effects on growth when they decrease their wage share along with their trading partners. The results indicate that a decline in the wage share has had significant negative effects on growth in the EU15 countries and supports the case of wage coordination. We present different wage-led recovery scenarios taking into account further effects of a change in the wage share on prices, nominal unit labour costs, investment, and net exports.

Secular stagnation and progressive economic policy alternatives

“…The main source of inspiration in this research is the new institutionalist political economy with its neoclassical origins, which highlights higher political instability and uncertainty (Alesina and Perotti, 1996); increased risk of popular support for redistribution and higher capital taxes with negative consequences for investment (Alesina and Rodrik, 1994;Persson and Tabellini, 1994); and the negative effects of credit market imperfections on human capital accumulation (Galor and Zeira, 1993). Most recently, a study by the IMF (Decressin et al, 2015) has also analysed the impact of a simultaneous decline in wages in all the Eurozone countries, and finds a negative effect on the GDP of the Eurozone as a whole; thus confirming one of the core results in the Post-Kaleckian literature (Onaran and Obst, 2015): A simultaneous decline in the wage share in all EU15 countries eliminates the positive competitiveness effects on net exports, and leads to overall negative impact on growth.…”

“…On the other hand, but the stimulus to private investment due to higher profits remain weak, if any at all, and at the same time private investment responds strongly to the fall in demand. Onaran and Obst (2015) show that despite increasing profit share in GDP, private investment decreased in the majority of the EU15 countries due to the substantially negative impact of the simultaneous fall in the wage share on demand across the EU15.…”

“…While this is puzzle from a neoclassical point of view, it is not unexpected for Post-Keynesian/Kaleckian economics, which highlight the dual role of wages as both a cost item and source of demand. Econometric findings in the Post-Kaleckian research tradition shows that a lower share of wages in national income leads to a lower GDP in most large countries (Onaran and Galanis, 2014;Onaran and Obst, 2015;Hein and Vogel, 2008;Naastepad and Storm, 2006/7;Stockhammer and Onaran, 2004). The negative impact is amplified when wage stagnation policies are imposed in an integrated region such as the EU via the European Commission policies (EC, 2006; or globally in the context of a global race to the bottom in labour share (Onaran and Galanis, 2014;Onaran and Obst, 2015;Stockhammer et al 2009).…”

“…The much celebrated impact of wage stagnation on external demand, i.e. higher net exports, is rather weak in the case of large, relatively closed economies, and the impact is diminished substantially when all countries implement the same international competiveness policies based on labour market flexibility and cuts to labour costs (Onaran and Galanis, 2014;Onaran and Obst, 2015). This leaves countries with the net negative impact of rising inequality on domestic demand, i.e.…”

A Study on the Trade Balance between China and U.S., Based on Cointegration Analysis

“…Their results provide a good explanation in evolution of trade balance and the demand seems to be more important, than relative prices. Onaran and Obst (2016), study the model of demand-led growth in the European Union's 15 countries.…”