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Redistribution in a Neo‐ K aleckian Two‐country Model
Author(s) -
Arnim Rudiger,
Tavani Daniele,
Carvalho Laura
Publication year - 2014
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12047
Subject(s) - economics , spillover effect , redistribution (election) , wage , wage share , productivity , labour economics , endogenous growth theory , efficiency wage , redistribution of income and wealth , monetary economics , microeconomics , macroeconomics , unemployment , market economy , politics , political science , law , human capital
Abstract We investigate the interaction between demand‐driven growth and income distribution in open economies, by combining expenditure‐switching and demand spillover effects in a neo‐ K aleckian two country model. First, we specify elasticities of wage share and real exchange rate to the money wage relative to labor productivity, in order to precisely describe the distributive pass‐through from money wages to the labor share and the real exchange rate. Second, we analyze the demand effects of an increase in the money wage for given labor productivity (a redistribution towards labor) in both H ome and F oreign country, as well as globally. We derive closed form results for two identical countries. These results indicate that redistribution towards labor at H ome: (i) always increases growth globally if H ome is wage‐led, but can lead to lower growth at H ome relative to F oreign; and (ii) will always imply lower growth at H ome relative to F oreign if H ome is profit‐led, but can still be growth‐enhancing at H ome. Thus, to the extent that countries are concerned with their relative economic performance, a fallacy of composition can emerge. Numerical simulations suggest that these fallacies could indeed occur. As a consequence, ‘returns to coordination’ over international labor policies might be substantial.