Functional income distribution and aggregate demand in the Euro-area

Engelbert Stockhammer, Ozlem Onaran and Stefan Ederer

Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics

Abstract: An increase in the wage share has contradictory effects on the subaggregates of aggregate demand. Private consumption expenditures ought to increase because wage incomes typically are associated with higher consumption propensities than capital incomes. Investment expenditures ought to be negatively affected because investment will positively depend on profits. Net exports will be negatively affected because an increase in the wage share corresponds to an increase in unit labor costs and thus a loss in competitiveness. Theoretically aggregate demand can therefore be either wage led or profit led depending on how these effects add up. The results will crucially depend on how open the economy is internationally. The paper estimates a Post-Kaleckian macro model incorporating these effects for the Euro area and finds that the Euro area is presently in a wage-led demand regime. Implications for wage policies are discussed.

JEL-codes: E12 E20 E22 E25 E61 (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-eec and nep-mac
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Related works:
Journal Article: Functional income distribution and aggregate demand in the Euro area (2009)
Working Paper: Functional income distribution and aggregate demand in the Euro-area (2007)
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