The dramatic decline in the share of wages in GDP in both the developed and developing world during the neoliberal era of the post-1980s has accompanied lower growth rates at the global level as well as in many individual countries. Ignoring the lessons of the past, mainstream economics continue to guide policy towards further wage moderation along with austerity as one of the major responses to the Great Recession, in particular in Europe. In our recent report for the International Labour Office (Onaran and Galanis, 2012), we show the vicious cycle generated by this decades’ long race to the bottom in wages. The main caveat of the mainstream common wisdom is to treat wages merely as a cost item. However, in reality wages have a dual role affecting not just costs but also demand. We work with a post-Keynesian/post-Kaleckian model, which allows this dual role, and thereby negative as well as positive effects of a fall in the share of wages relative to profits. We estimate the effect of a change in income distribution on aggregate demand (i.e. on consumption, investment, and net exports) in the G20 countries (sixteen large developed and developing countries where wage share data is available).
Özlem Onaran is Professor of Economics at the University of Greenwich, U.K. She regularly publishes research studies on globalization, income distribution, employment, business investment, and financial crises in publications such as the Cambridge Journal of Economics, World Development, Eastern European Economics, and Labour. She recently co-authored a major study for the International Labour Organization on the relative importance of decent wages versus high profits as an engine of economic growth in several countries throughout the world.
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