g inequality determines an increase in the capital‐income ratio; if the elasticity of substitution in production is above one, the profit share rises. We provide a contrasting explanation that draws from the Post Keynesian approach to differential saving propensities between classes and the Classical‐Marxian theory of induced technical change. In a simple model of “capitalists” and “workers,” we show that institutional changes that lower the labor share—declining unionization, increasing monopsony power in the labor market, the global ‘race to the bottom' in unit labor costs or the exhaustion of path‐breaking scientific discoveries—can reduce labor productivity growth because of the lessened incentives to innovate to save on labor costs. A falling labor share reduces workers' total savings, and wealth concentrates in the capitalists' hands. A higher profit share and wealth share both put pressure on accumulation: but the long‐run growth rate, which is anchored to labor productivity growth, has fallen. To restore balanced growth, the capital‐income ratio must rise, independent of the elasticity of substitution. These tendencies are not inevitable: taxation can be used to implement any wealth distribution targeted by policymakers, while worker‐crushing institutional arrangements can also in principle be reversed through policy. Neither change appears likely given the current institutional and global policy climate."> g inequality determines an increase in the capital‐income ratio; if the elasticity of substitution in production is above one, the profit share rises. We provide a contrasting explanation that draws from the Post Keynesian approach to differential saving propensities between classes and the Classical‐Marxian theory of induced technical change. In a simple model of “capitalists” and “workers,” we show that institutional changes that lower the labor share—declining unionization, increasing monopsony power in the labor market, the global ‘race to the bottom' in unit labor costs or the exhaustion of path‐breaking scientific discoveries—can reduce labor productivity growth because of the lessened incentives to innovate to save on labor costs. A falling labor share reduces workers' total savings, and wealth concentrates in the capitalists' hands. A higher profit share and wealth share both put pressure on accumulation: but the long‐run growth rate, which is anchored to labor productivity growth, has fallen. To restore balanced growth, the capital‐income ratio must rise, independent of the elasticity of substitution. These tendencies are not inevitable: taxation can be used to implement any wealth distribution targeted by policymakers, while worker‐crushing institutional arrangements can also in principle be reversed through policy. Neither change appears likely given the current institutional and global policy climate.">
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Income shares, secular stagnation and the long‐run distribution of wealth

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  • Luke Petach
  • Daniele Tavani
Abstract
Four alarming stylized facts have recently emerged in the United States: (a) a decline in the labor share of income; (b) a decline in labor productivity; (c) an increase in the top 1% wealth share and (d) an increase in the capital‐income ratio. In Capital in the XXI Century, Thomas Piketty's argument is that the r > g inequality determines an increase in the capital‐income ratio; if the elasticity of substitution in production is above one, the profit share rises. We provide a contrasting explanation that draws from the Post Keynesian approach to differential saving propensities between classes and the Classical‐Marxian theory of induced technical change. In a simple model of “capitalists” and “workers,” we show that institutional changes that lower the labor share—declining unionization, increasing monopsony power in the labor market, the global ‘race to the bottom' in unit labor costs or the exhaustion of path‐breaking scientific discoveries—can reduce labor productivity growth because of the lessened incentives to innovate to save on labor costs. A falling labor share reduces workers' total savings, and wealth concentrates in the capitalists' hands. A higher profit share and wealth share both put pressure on accumulation: but the long‐run growth rate, which is anchored to labor productivity growth, has fallen. To restore balanced growth, the capital‐income ratio must rise, independent of the elasticity of substitution. These tendencies are not inevitable: taxation can be used to implement any wealth distribution targeted by policymakers, while worker‐crushing institutional arrangements can also in principle be reversed through policy. Neither change appears likely given the current institutional and global policy climate.

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  • Luke Petach & Daniele Tavani, 2020. "Income shares, secular stagnation and the long‐run distribution of wealth," Metroeconomica, Wiley Blackwell, vol. 71(1), pages 235-255, February.
    • Handle: RePEc:bla:metroe:v:71:y:2020:i:1:p:235-255
    DOI: 10.1111/meca.12277
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    Cited by:

    1. Zamparelli, Luca, 2021. "Induced Technical Change and Income Distribution: the Role of Public R&D and Labor Market Institutions," MPRA Paper 108431, University Library of Munich, Germany.
    2. Özlem Onaran & Cem Oyvat & Eurydice Fotopoulou, 2019. "The effects of gender inequality, wages, wealth concentration and fiscal policy on macroeconomic performance," FMM Working Paper 50-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Zamparelli, Luca, 2022. "On Labor Productivity Growth and the Wage Share with Endogenous Size and Direction of Technical Change," MPRA Paper 112684, University Library of Munich, Germany.
    4. Jose Barrales‐Ruiz & Ivan Mendieta‐Muñoz & Codrina Rada & Daniele Tavani & Rudiger von Arnim, 2022. "The distributive cycle: Evidence and current debates," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 468-503, April.
    5. Di Bucchianico, Stefano, 2020. "Discussing Secular Stagnation: A case for freeing good ideas from theoretical constraints?," Structural Change and Economic Dynamics, Elsevier, vol. 55(C), pages 288-297.
    6. Zamparelli, Luca, 2024. "On the positive relation between the wage share and labor productivity growth with endogenous size and direction of technical change," Economic Modelling, Elsevier, vol. 131(C).
    7. Petach, Luke & Tavani, Daniele, 2022. "Aggregate demand externalities, income distribution, and wealth inequality," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 433-446.
    8. Mark Setterfield, 2023. "Post-Keynesian growth theory and the supply side: a feminist-structuralist approach," Working Papers 2302, New School for Social Research, Department of Economics.
    9. Stamegna, Marco, 2022. "Induced innovation, the distributive cycle, and the changing pattern of labour productivity cyclicality: a SVAR analysis for the US economy," MPRA Paper 113855, University Library of Munich, Germany.
    10. Stamegna, Marco, 2022. "A Kaleckian growth model of secular stagnation with induced innovation," MPRA Paper 113794, University Library of Munich, Germany.
    11. Hiroaki Sasaki, 2022. "Growth and income distribution in an economy with dynasties and overlapping generations," Evolutionary and Institutional Economics Review, Springer, vol. 19(1), pages 215-238, April.
    12. Tavani, Daniele & Zamparelli, Luca, 2021. "Labor-augmenting technical change and the wage share: New microeconomic foundations," Structural Change and Economic Dynamics, Elsevier, vol. 56(C), pages 27-34.
    13. Ibarra, Carlos A. & Ros, Jaime, 2023. "Trade and factor intensity, and the transmission of the global shock to labor: A panel analysis of the fall of the labor income share in the Mexican manufacturing sector," Economic Systems, Elsevier, vol. 47(1).
    14. Sasaki, Hiroaki & Sonoda, Ryunosuke, 2024. "Income Redistribution Policy, Growth, Inequality, and Employment: A Long-Run Kaleckian Approach," MPRA Paper 121968, University Library of Munich, Germany.
    15. Peter Flaschel & Sigrid Luchtenberg & Hagen Kramer & Christian Proano & Mark Setterfield, 2021. "Contemporary Macroeconomic Outcomes: A Tragedy in Three Acts," Working Papers 2105, New School for Social Research, Department of Economics.

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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