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Personal income distribution and the endogeneity of the demand regime

Tonni, Lorenzo (2021): Personal income distribution and the endogeneity of the demand regime.

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Abstract

This paper deals with two intrinsically linked issues: the endogeneity of the demand regime and the personal distribution impact on aggregate demand. By microfounding the savings function, the aggregate savings rate is an increasing function of the Gini index, which in turn is decomposed as a function of the functional income distribution and the Gini indices for wages and profits. By assuming that saving is a function of personal rather than functional income distribution, an increase of the labour share is effective in boosting consumption and aggregate demand, not per se, but only as long as it reduces personal inequality. As the labour share increases, depending on the distribution of wages and profits, both the demand regime type – the sign of the slope of the demand schedule - and its strength- the size of the slope of the demand schedule - can endogenously change. Concerning the former, there can be a threshold value for the wage share beyond which there is a shift from wage-led to profit-led demand. The analysis shows that, unlike most Kaleckian models, profit inequality is just as important as wage inequality in determining the demand regime type and its strength.

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