September 9, 2018

No doubts about wage-led growth

Comment on Chris Dillow on ‘Doubts About Wage-led Growth’

Blog-Reference and Blog-Reference on Sep 12

Chris Dillow asks: “The question here, then, is: can we have wage-led growth, whereby higher wages trigger growth and productivity improvements? Or do we need profit-led growth, in which firms are induced to invest by high profit margins?”

The question shows that Chris Dillow lacks true employment and profit theory. Therefore, there is not much use to refute his wish-washy in great detail.

To cut the meticulous formal derivation short, an elementary version of the axiomatically correct systemic Employment Law is shown on Wikimedia AXEC62: #1, #2, #3, #4


From this equation follows inter alia:
(i) An increase in the expenditure ratio ρE leads to higher employment L (the Greek letter ρ stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.

The complete Employment Law is a bit longer and contains in addition profit distribution, the public budget, and import/export.

Items (i) and (ii) are familiar since Keynes. But Keynesian macroeconomics is incomplete. The correct employment multiplier is composed of the expenditure ratio and the factor cost ratio. The ratio ρF as defined in (iii) embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

The Employment Law tells one that there are multiple policy levers, i.e. independent variables on the right-hand side of the =sign. What has to be done is to combine demand-led and wage-led expansion in order to get out of unemployment. All determinants have to be dealt with separately. Focusing on the macroeconomic price-mechanism, the variable ρF tells one UNAMBIGUOUSLY that the (average) wage rate must grow faster than the combination of price and productivity in order to increase overall employment.#5

Egmont Kakarot-Handtke


#1 Demand-led and wage-led growth
#2 NAIRU, wage-led growth, and Samuelson's Dyscalculia
#3 You have the data, here is the Employment Law
#4 For more details see cross-references Employment/Phillips Curve
#5 Go! ― test the Profit and Employment Law