Endogeneity of labor productivity and the real wage rate in a Kaleckian model - Why it makes a difference

Description

In this paper, endogenous labor productivity and endogenous real wages are incorporated into an open economy version of the Bhaduri-Marglin model. Productivity is influenced by the real wage rate and the rate of utilization of the capital stock. Real wages are a function of the rate of capacity utilization to reflect changes in the bargaining position of labor unions. Taking these relations into account, the conditions for wage-led or profit-led regimes do not change, but with a pro-cyclical profit share, the negative effect of real wage restraint on output in a wage-led demand regime is smaller than in the standard framework, i.e. the IS-curve is flatter. The reasons are the redistributive effects of the decrease in productivity and the second round fall in profit share after the initial fall in output. For the profit-led demand regime, the result is ambiguous. The positive impact of real wage restraint on output can either be larger or smaller than in the standard model, depending on whether the negative productivity effect, caused by lower rationalization pressure, or the positive second round effect of a pro-cyclical profit share dominates.

Period	31 Oct 2009
Event title	The World Economy in Crisis - The Return of Keynesianism?
Event type	Conference
Location	GermanyShow on map