Asset and labour markets in economic growth

In the last two decades a renewed interest in understanding the factors that promote economic growth can be perceived in economics. A huge array of possible influences from education and geography to institutions and inequality has been investigated. Most studies are conducted in the framework of `endogenous growth` theory which exclusively focuses on supply side factors. In contrast the explanation of economic growth in the tradition of Keynes and Kalecki centres on investment demand and its determinants, especially capacity utilisation and profitability; due to the latter the issue of distribution and redistribution is at the core of these theories. In the present project a particular model in this line of investigation, viz. the Bhaduri-Marglin model, will be evaluated empirically and elements which have become increasingly relevant in recent years like asset market bubbles will be incorporated. The adequacy and relevance of the model can best be assessed by testing it empirically. It will be interesting to see for which countries (the major OECD countries and Austria will be studied) and which periods growth has been either `profit-led` or `wage-led`. These types of regime refer to a constellation where redistribution in favour of profits or in favour of wages respectively will stimulate growth. In recent years the ups and downs of the stock market have attracted great attention. It has indeed been shown that wealth effects have a considerable impact on (consumption) spending. This spending is often financed by a simultaneous increase in household indebtedness with capital gains serving as collateral (this pattern is especially marked in housing markets), which makes the reverse impact of a declining asset market on demand particularly severe. In the project we will model the cycle of indebtedness and spending and the repercussions on distribution, with special attention to the housing market. The labour markets have become increasingly complex in the last decades and their purely passive role in Keynesian explanations of growth ever more inadequate. The project will incorporate such phenomena as hysteresis - i.e. the lasting effects of previous conditions - and the size of the capital stock on the present strength of the bargaining parties in the labour market and thus on distribution in the growth model.

The dual role of wages as a source of demand and an element of coct is well established also in public discourse. While lower real wages on the one hand lower consumer demand, on the other hand they may (via increased profitability) increase investment demand and (via enhanced international competitiveness) net exports. It depends on the relative weight of these channels whether real wages that lag behind productivity increases, as was observed in several countries in recent decades, stimulate or dampen growth. The classical theoretical framework in this area is the Bhaduri - Marglin model (Bhaduri - Marglin (1990)). The present project`s aim was to empirically implement this model for several countries and in various formats and to deepen its theoretical structure. For Austria we find that the boost in investment triggered by wages that lag behind productivity increases is not large enough to compensate for the concomitant consumption decrease. Taking additionally into account the rise in net exports due to the improved international competitiveness position a small rise in output can be established. The latter effect however presupposes that the unit labour costs of trading partners are constant which hardly ist he case. A similar result holds for the European Union (EU). Considered as a single unit wage moderation has no stimulative effect on output. This is essentially due to the low export share of the EU as a whole so that the export stimulus is weak. Member countries on the other hand typically exhibit high export shares with the bulk of international trade being intra-EU. This implies that for a single country - treated in isolation - lower wages via increased international competitiveness would have an expansive effect. The member states are in a kind of prisoners` dilemma situation where the strategy of wage moderation seemingly rational for an individual country does not induce the envisaged result, if all member countries collectively follow this strategy. This opens scope for wage coordination on the European level so as to attain wage increases at or above productivity increases and thus taking advantage of the wage-led character of the EU as a whole. On the theoretical level we attempted to model more precisely the financial sector, which has increased in importance in recent decades, by e.g. studying a separate rentier class which receives part of the profit income but has an assumed higher propensity to consume compared to other profit earners and thus executes spezial influence on consumption and investment demand.