The imprudence of labour market flexibilization in a fiscally austere world

. This article assesses the effects of combining fiscal austerity with policies aimed at reducing labour costs and, in doing so, sheds new light on current policy debates. Taking a global perspective, the authors explore the aggregation problem by proposing a stylized analytical macro‐model with explicit distribution dynamics. In this framework, flexibilization policies that suppress the labour share trigger global feedbacks that result in a downward spiral, with contraction even in export‐led economies. The initial gains of more competitive economies are shown to be ephemeral. In the long term, the world economy is essentially wage‐led and responds positively to coordinated Keynesian stimuli.