If demand (utilization) is profit-led, then growth (accumulation) is also profit-led. In an intermediate case, aggregate demand or capacity utilization can be weakly wage-led while growth is profit-led, a case called ‘conflictual stagnationist’ by Marglin and Bhaduri (1990) and ‘conflictive’ by Palley (2016). In this paper, I use the more descriptive terms ‘wage-led’ and ‘profit-led’ instead of the more colorful but sometimes confusing terminology of ‘stagnationism’ and ‘exhilarationism’ employed by Bhaduri and Marglin.
There is a typographical error in the published cointegrating equation for output, but I have verified (in email from Gustavo Vargas Sánchez, 14 October 2014) that the sign on the exploitation rate (profit share) should be negative.
Earlier, Pérez Caldentey and Vernengo (2013) found that the real wage has a greater ‘coherence’ and ‘dynamic correlation’ with output and investment in several countries using low frequency data compared with medium or high frequency data, but they did not test for the wage share (that is, the real wage adjusted for productivity) and their methods cannot identify the direction of causation between the real wage and the other variables.
In practice, empirical researchers often use different price indexes for exported and imported goods, but I simplify here for expositional purposes.
The last partial derivative, NXP < 0, assumes that the Marshall–Lerner condition holds.
If these effects are estimated as elasticities, then it is necessary to weight them by the shares of the various components of GDP in total GDP.
If autoregressive distributed lag (ARDL) or VAR/VEC methods are used (and they usually are), then lags of the dependent variable (Y) are also included on the right-hand side of the regression equation.
Several economists have argued that debt and other financial indicators could be key omitted variables in this literature. Stockhammer and Michell (2016) demonstrate theoretically that Minskyan debt dynamics based on financial fragility can foster cycles in which utilization appears to be profit-led (because profitability is squeezed at the same time as output falls) even when no causal linkage between distribution and demand is assumed, or if demand is actually wage-led. On the empirical side, Palley (1994) and Kim (2013) provide econometric evidence demonstrating how debt variables affect output in the US economy, while Stockhammer and Wildauer (2015) estimate a structural model (in the sense defined above) that controls for financial factors using international panel data. In regard to simultaneity, Fernandez (2005) controlled for endogeneity of the profit share in an aggregative approach by using instrumental variables (IV) methods applied to estimates of simultaneous equations for the US profit share and utilization rate. He found that changes in the profit share were largely explained by a variable reflecting international competitiveness (relative unit labor costs). Barrales and von Arnim (2017) find bidirectional causality between each of their three alternative measures of demand (discussed earlier) and the wage share, suggesting that any estimates that treat the wage (or profit) share as exogenous are subject to simultaneity bias.
One exception is López et al. (2011), who did not attempt to estimate the effects of the wage share on demand and instead estimated the impact of underlying, exogenous determinants of both output and distribution. Another exception is Kiefer and Rada (2015), who found evidence for a ‘race to the bottom’ of many countries simultaneously seeking to drive their labor costs lower.
Obst and Onaran (2016) address the latter type of interaction by calculating the direct and indirect effects of the wage share on investment using a structural model, and find that the indirect effects (via consumption) make investment (growth) wage-led in many European countries. They do not, however, address the former type.
Some economists argue that the finding of profit-led demand may be misleading even in the short run. Lavoie (1995; 2014) observes that the profit share varies pro-cyclically because firms hoard overhead labor (and therefore experience a fall in measured labor productivity) during recessions, which implies that a positive correlation of the profit share and the utilization rate does not necessarily imply causality flowing from the former to the latter.
The HP filter was applied using the conventional value of 1600 for the lambda smoothing parameter with quarterly data. The fact that HP filters tend to put too much of the cycle into the trend is noted by Gordon and Krenn (2010), among others. Cogley and Nason (1995) show that HP filters can also generate spurious cycles where none exist. I am indebted to Gabriel Mathy for these references.
The user cost of capital is a measure that combines the costs of external funds (interest rates on bonds and dividend pay-outs to stockholders), depreciation costs, and relative prices of capital goods, adjusted for tax policies that affect incentives for investment. See Chirinko et al. (1999, p. 57) for details.
This characterization might not apply in a structurally different situation, such as a developing or emerging market country in which capital markets are weak and investment is typically internally financed. Also, in countries where industries are highly export-oriented and a large portion of investment is dependent on international competitiveness in regard to attracting foreign capital inflows, domestic profit margins compared with those of rival nations could matter to long-term investment decisions.
However, Blecker also shows that a rise in the wage share caused by a reduction in the monopoly power of firms will not have this consequence, and could have a positive impact on net exports if mark-ups are reduced on internationally traded goods.
The standard ML condition is that the sum of these elasticities must exceed unity in absolute value under certain simplifying assumptions, including initially balanced trade. Modified ML conditions can be derived under more general assumptions.
The price elasticities of demand for exports and imports are likely to be low in the very short run (when firms are locked into contracts and goods have already been ordered or are being shipped) and to increase over time (as ordering and delivery lags are overcome, and firms can recontract with new suppliers). The result is that the trade balance (net exports) often worsens in the immediate aftermath of a currency devaluation, when the main impact is to raise import costs, but then subsequently improves, leading to a trajectory that roughly follows a ‘J’ shape. Most analyses show that the J-curve turns upward within about 1–2 years, which is still within the short run for present purposes.
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