Income distribution, employment growth & the Kaldor-Verdoorn growth facts.

AuthorPadhi, Satya Prasad
PositionStatistical data

This paper advocates two different demand side explanations of the Verdoorn-Kaldor law that permits two different types of increasing returns with different employment implications. One is the realization of economies of scale that does not permit a strong relationship between employment growth and productivity growth. The other is the division of labor-led increasing returns as part of economic progress with robust induced employment growth for maintaining division of labor-led productivity growth in a cumulative manner. This paper shows that division of labor-led growth sticks to prices, in the face of productivity increases that translate into intermediate cost reduction, shapes the evolution of distribution of income that in turn shapes the employment-productivity relationship.

Introduction

In the Solow model, growth of employment is associated with productivity growth that also allows growth of wages and profits (keeping the shares of labor and capital constant). However, full employment along the path of growth is maintained by a perfectly competitive price mechanism, which implies that individual initiatives make only static adjustments that cannot generate the growth path; productivity growth is exogenous. At the same time, if the continuous developed status of countries should highlight the strong positive association between labor productivity growth and employment growth, with higher wages, and if this can be attributed to firm-specific initiatives, which has to be compensated in terms of higher profits, there is the need for an alternative perspective that can capture the essence of such initiatives. In this context, the present paper endeavors to illustrate that a broad reinterpretation of Young (1928) can identify such firm-specific individual initiatives. The basic hypothesis developed in this paper is that more productive investment that shapes the desired evolution of income distribution induces in turn increases in more (and more productive) employment opportunities that in turn permit the possibility of higher growth of productivity that can ensure still higher wages (and profits). This process can continue in a cumulative manner.

In the literature (Kaldor, 1966; 1972; 1975; Rowthorn, 1979), it is recognized that the Keynesian insight that investment creates higher market size is indispensable for the Youngian thesis that better supply response can beget further better supply responses (and that can go on in a cumulative manner). Here, the paper tries to show that (if the focus is on higher employment growth that should be associated with higher labor productivity growth) any investment that embodies better supply responses as such is not important for further elaboration of the Youngian thesis. There is, in fact, the need to bringing in the importance of division of labor-led growth processes. More specifically, the present paper tries to show that division of labor-led price stickiness, in the face of intermediate cost reduction, shapes the evolution of the desired distribution of income, which, in turn can permit the association between higher employment growth and labor productivity growth. This issue of income distribution was not discussed by Young (1928; and in his further elaboration by Kaldor); this could explain, and here the contribution of the paper lies, as to why Kaldor (1975), in his elaboration of Verdoorn-Kaldor law, dismissed the possibility of a strong employment growth-labor productivity growth nexus, as irrelevant, in the conceptualization of a demand-led growth thesis. In the present paper, the division of labor-led income distribution permits a significant association between employment and productivity growth and is consistent with (or reinforces) the discussion of demand-led causality underlying Vardoorn-Kaldor law. Last, the paper concludes with an empirical study of Indian demand-led manufacturing growth that highlights that the demand-led increasing returns permits the discussion of two types of increasing returns, with different employment implications. One is the realization of increasing returns to scale-led income distribution that cannot support the strong association between employment growth and labor productivity growth; in any case, its role in promoting growth in a cumulative manner is also suspect. The second is the realization of division of labor-led increasing returns-led distribution of income that permits a strong association between employment growth and labor productivity growth, and reinforces the cumulative growth possibility. The role of a magnified increase in market size however is important for the division of labor-led growth process and the note, therefore, starts with the discussion of such a growth process in a post-Keynesian framework-based conceptualization of the aggregate market size.

Post Keynesian Statics

The post-Keynesian static (Yellen, 1980: 15-17) of saving investment identity is

[S.sub.w] (wN/P) + [S.sub.p] (Y - wN/P) = I (1)

Where [S.sub.w] and [S.sub.p] are the savings propensities of workers and profit earners, w and P denote the wage rate and price level, N and Y denote employment and real output, and I denotes real investment.

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In the above diagram (1), the equation (1) (or equivalently, w/PN([S.sub.w] - [S.sub.p])/ [S.sub.p] = I/[S.sub.p]--Y) (and assuming [S.sub.w]

Y = I/([S.sub.p] - ([S.sub.p] - [S.sub.w]/m) (2)

If the denominator in the above equation shows the economy's average propensity to save, an increase in investment raises the output by the standard Keynesian multiplier. The firms' pricing policy and the value of m (with given labor productivity) would determine the real wages (and share of output) such that an increase in m would reduce output. (1) However, it is the real output that would determine the employment (by assumption). If so, in a dynamic framework, the growth of output (with real wages and wage share) would determine the growth of employment.

Modified Youngian-Kaldorian Contributions

In the post Keynesian literature, the above eauation is discussed in I/Y terms (with given savings propensities and shares) and to retain the static framework (with given capital output ratio), the growth of output is driven mainly by exogenous (Harrod-neutral) labor productivity growth. In addition, allowing for full employment, the labor productivity growth (and employment growth via output growth) has to translate into higher real wages growth (Kaldor, 1955-6; Passinetti, 1974). However, the problem of this dynamics is that, as the recent endogenous growth literature notes (Romer, 1991), one should not only realistically allow for the way in which individual initiatives create such productivity growth possibility but also permit (in modeling) compensation to such efforts. Therefore, if, in line with the emphasis on 'investment' in post Keynesian literature, the focus should be on the investment that allows for higher labor productivity (not a decrease in n with a given capacity, as noted above), the resultant growth process should allow for higher returns to such investment. However, if so, and if the focus is on higher m, the problem of the income distribution (as postulated by the post Keynesian static framework) would again resurface.

It is here that...

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