Are higher wages good for business? An assessment under alternative innovation and investment scenarios

Caiani, Alessandro and Russo, Alberto and Gallegati, Mauro (2017): Are higher wages good for business? An assessment under alternative innovation and investment scenarios.

Abstract

This paper aims at investigating the interplay between inequality, innovation dynamics, and investment behaviors in shaping the long-run patterns of development of a closed economy. By extending the analysis proposed in Caiani et al. (2017) we explore the effects of alternative wage regimes under different investment and technological change scenarios. Experiments results seem to de-emphasize the role of technological progress as a possible source of greater inequality. Overall, simulation results are consistent with the predominance of a wage-led growth regime in most of the scenarios analyzed: a faster growth of low and middle level workers’ wages, relative to managers’, generally exert beneficial effects on the economy and allows to counteract the labor-saving effects of technological progress. Furthermore, contrary to what is sometimes argued in the academic and political debate, a distribution more favorable to workers does not compromise firms’ profitability, but rather strengthen it creating a more favorable macroeconomic environment which encourages further innovations, stimulates investment, and sustains economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Innovation; Investment; Inequality; Agent-Based Macroeconomics; Stock Flow Consistent Models
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E64 - Incomes Policy ; Price Policy; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models

References

Abowd, J. M., Kramarz, F., and Margolis, D. N. (1999). High wage workers and high wage firms. Econometrica, 67(2):251–333.

Acemoglu, D. (1998). Why do new technologies complement skills: Directed technical change and wage inequality. Quarterly Journal of Economics, 113:1055–1089.

Acemoglu, D. (2002). Technical change, inequality, and the labor market. Journal of Economic Literature, 40:7–72.

Acemoglu, D. (2007). Equilibrium bias of technology. Econometrica, 75(5):1371–1409.

Acemoglu, D., Robinson, J. A., and Verdier, T. (2012). Can’t we all be more like Scandinavians? Asymmetric growth and institutions in an interdependent world. NBER Working Papers, 18441.

Aghion, P., Akcigit, U., Bergeaud, A., Blundell, R., and Hemous, D. (2015). Innovation and top income inequality. NBER Working Papers, 21247.

Aghion, P. and Howitt, P. (1997). Endogeneous Growth Theory. MIT Press.

Antonelli, C. and Gehringer, A. (2013). Innovation and income inequality. Technical report, University of Turin. Department of Economics and Statistics Cognetti de Martiis LEI & BRICK, Collegio Carlo Alberto. WP series.

Atkinson, A. B., Piketty, T., and Saez, E. (2011). Top incomes in the long run of history. Journal of Economic Literature, 49(1):3–71.

Caiani, A., Godin, A., Caverzasi, E., Gallegati, M., Kinsella, S., and Stiglitz, J. E. (2016). Agent Based-Stock Flow Consistent Macroeconomics: Towards a benchmark model. Journal of Economic Dynamics & Control, 69:375–408.

Caiani, A., Russo, A., and Gallegati, M. (2017). Does inequality hamper innovation and growth? Journal of Evolutionary Economics, forthcoming.

Carlin, W. and Soskice, D. (1990). Macroeconomics and the Wage Bargain: A Modern Approach to Employment, Inflation, and the Exchange Rate. Oxford University Press.

Ciarli, T., Lorentz, A., Savona, M., and Valente, M. (2010). The effect of consumption and production structure on growth and distribution. A micro to macro model. Metroeconomica, 61(1):219–246.

Delli Gatti, D., Gallegati, M., Greenwald, B. C., Russo, A., and Stiglitz, J. E. (2010). The financial accelerator in an evolving credit network. Journal of Economic Dynamics & Control, 34:1627–1650.

Domar, E. (1947). Expansion and employment. American Economic Review, 37:34–55.

Dosi, G., Fagiolo, G., Napoletano, M., and Roventini, A. (2013). Income distribution, credit and fiscal policies in an agent-based Keynesian model. Journal of Economic Dynamics and Control, 37(8):1598–1625.

Dosi, G., Fagiolo, G., and Roventini, A. (2010). Schumpeter meeting Keynes: A policy-friendly model of endogenous growth and business cycles. Journal of Economic Dynamics and Control, 34(9):1748–1767.

Dosi, G., Pereira, M., Roventini, A., and Virgillito, M. (2017). When more flexibility yields more fragility: The microfoundations of keynesian aggregate unemployment. Journal of Economic Dynamics and Control, 81.

Dutt, A. K. (1987). Alternative closures again: a comment on growth, distribution and inflation. Cambridge Journal of Economics, 11(1):75–82.

Dynan, K. E., Skinner, J., and Zeldes, S. P. (2004). Do the rich save more? Journal of Political Economy, 112(2):397–444.

Eichner, A. S. (1976). The Megacorp and Oligopoly: Micro Foundations of Macro Dynamics. Cambridge University Press.

Goldin, C. and Katz, L. F. (2008). The Race Between Education and Technology. Harvard University Press.

Harrod, H. (1939). An essay in dynamic theory. Economic Journal, 49-193:14–33.

Hein, E. and Vogel, L. (2008). Distribution and growth reconsidered empirical results for six OECD countries. Cambridge Journal of Economics, 32:479–511.

Hopkin, J., Lapuente, V., and Moller, L. (2014). Lower levels of inequality are linked with greater innovation in economies. Technical report, London School of Economics and Political Science. LSE’s USApp blog.

Jacobs, E. (2016). What do trends in economic inequality imply for innovation and entrepreneurship? A framework for future research and policy. Technical report, Washington Center for Equitable Growth.

Jaumotte, F. and Buitron, C. O. (2015). Inequality and labor market institutions. Staff Discussion Notes SDN/15/14.

Jones, C. I. and Kim, J. (2014). A Schumpeterian model of top income inequality. NBER Working Papers, 20637.

Kaldor, N. (1957). A model of economic growth. Economic Journal, 67(268):591–624.

Katz, L. F. and Murphy, K. M. (1992). Change in relative wages: Supply and demand factors. Quarterly Journal of Economics, 107:35–78.

Kumhof, M., Ranciere, R., and Winant, P. (2015). Inequality, leverage and crises. American Economic Review, 105(3):1217–1245.

Lavoie, M. (1992). Foundations of Post-Keynesian Economic Analysis. Edward Elgar, Aldershot.

Lavoie, M. (2015). Post-Keynesian Economics: New Foundations. Edward Elgar.

Lavoie, M. and Stockhammer, E. (2012). Wage-led growth: Concept, theories and policies. International Labor Office. Conditions of Work and Employment Series, 41.

Lydall, H. F. (1959). The distribution of employment incomes. Econometrica, 27(1):110–115.

McCombie, J. S. L. (2002). Increasing returns and the Verdoon law from a Kaldorian perspective. In McCombie, J. S. L., Pugno, M., and Soro, B., editors, Productivity Growth and Economic Performance: Essays on Verdoon’s Law, pages 64–114. Palgrave Macmillan.

Naastepad, C. W. M. and Storm, S. (2006). OECD demand regimes (19602000). 29: 21348. Journal of Post-Keynesian Economics, 29-2:213–248.

Napoletano, M., Dosi, G., Fagiolo, G., and Roventini, A. (2012). Wage formation investment behavior and growth regimes: An agent-based analysis. Revue de l’OFCE. Debates and policies, 124:235–261.

Nelson, R. and Winter, S. (1977). Simulation of Schumpeterian Competition. The American Economic Review, 67-1:271–276.

Nelson, R. and Winter, S. G. (1982). An Evolutionary Theory of Economic Change. Harvard University Press, Cambridge MA., Cambridge, MA.

Onaran, O. and Galanis, G. (2012). Is aggregate demand wage-led or profit-led? National and global effects. International Labor Office. Conditions of Work and Employment Series, 40.

Onaran, O. and Obst, T. (2016). Wage-led growth in the EU15 member states: the effects of income distribution on growth, investment, trade balance, and inflation. Cambridge Journal of Economics, 40-6:1517–1551.

Perugini, C., Holscher, J., and Collie, S. (2016). Inequality, credit and financial crises. Cambridge Journal of Economics, 40(1):227–257.

Piketty, T. (2014). Capital in the Twenty-First Century. Harvard University Press.

Piketty, T., Saez, E., and Stantcheva, S. (2014). Optimal taxation of top labor incomes: A tale of three elasticities. American Economic Journal: Economic Poliy, 6(1):230–271.

Piketty, T. and Zucman, G. (2014). Capital is back: Wealth-income ratios in rich countries 1700-2010. Quarterly Journal of Economics, 129-3:1255–1310.

Prescott, E. S. (2003). Firms, assignments, and earnings. Federal Reserve Bank Richmond Economic Quarterly, 89(4):69–81.

Riccetti, L., Russo, A., and Gallegati, M. (2015). An agent-based decentralized matching macroeconomic model. Journal of Economic Interaction and Coordination, 10-2:305–332.

Rowthorn, R. (1981). Demand, real wages and economic growth. Thames Papers in Political Economy, Autumn:1–39.

Russo, A., Riccetti, L., and Gallegati, M. (2016). Increasing inequality, consumer credit and financial fragility in an agent based macroeconomic model. Journal of Evolutionary Economics, 26(1):25–47.

Salle, I. and Yildizoglu, M. (2014). Efficient sampling and meta-modeling for computational economic models. Computational Economics, 44-4:507–536.

Simon, H. (1957). The compensation of executives. Sociometry, 20:32–35.

Steindl, J. (1952). Maturity and Stagnation in American Capitalism. Blackwell.

Stiglitz, J. E. (2012). The Price of Inequality. Norton & Co Inc.

Stiglitz, J. E. (2015). The Great Divide: Unequal Societies and What We Can Do About Them. Norton & Co Inc.

Stockhammer, E. and Onaran, O. (2013). Wage-led growth: theory, evidence, policy. Review of Keynesian Economics, pages 61–78.

Stockhammer, E., Onaran, O., and Ederer, S. (2009). Functional income distribution and aggregate demand in the euro area. Cambridge Journal of Economics, 33-1:139-159.

Storm, S. and Naastepad, C. W. M. (2012). Macroeconomics Beyond the NAIRU. Harvard University Press.

Taylor, L. (1983). Structuralist Macroeconomics: Applicable Models for the Third World. Basic Books.

Thirlwall, A. (1983). A plain mans guide to Kaldor's growth laws. Journal of Post Keynesian Economics, 5-3:345–358.

Vergeer, R. and Kleinknecht, A. (2010). The impact of labor market deregulation on productivity: A panel data analysis of 19 OECD countries (1960-2004). Journal of Post Keynesian Economics, 33(2):371–407.

Vergeer, R. and Kleinknecht, A. (2014). Do labor market reforms reduce labor productivity growth: A panel data analysis of 20 OECD countries (1960-2004). International Labour Review, 153(3):365–393.

Waldman, M. (1984). Workers allocation, hierarchies and the wage distribution. Review of Economic Studies, 51:95–109.

Weinhold, D. and Nair-Reichert, U. (2009). Innovation, inequality and intellectual property rights. World Development, 37(5):889–901.

Winter, S. G. (1984). Schumpeterian Comptetion in alternative technological regimes. Journal of Economic Behavior and Organization, 5:287–320.