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A note on ‘Wage-led versus profit-led demand regimes: the long and the short of it’

Lilian N. Rolim

Keywords: growth and distribution; wage-led growth; profit-led growth; short and long runs; time-series econometrics; cointegration

The aggregative and structural approaches are the main approaches used to investigate the US demand regime. They have reported mixed findings whereby the former tends to find profit-led results and the latter tends to find wage-led results. Blecker (2016) suggests that those conflicting findings can be explained, at least in part, by the different time dimensions captured by the two approaches. That is because the US economy tends to be profit-led in the short run and wage-led in the long run. This note discusses and extends Blecker's analysis. An alternative interpretation of the findings of studies using the structural approach is offered, suggesting that their conclusions rest on their handling of the short run. Specifically, the structural approach fails to find cointegration relations among integrated variables in most equations. That absence means it fails to pick up the stronger effect of the wage share on consumption in the long run, which is a key mechanism explaining different regimes across time horizons. The note concludes by briefly discussing other possible explanations for the conflicting results reported in the empirical literature.

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