Incorporating labour markets into a Kaleckian model: An empirical assessment of the effects of labour constraints on the rate of accumulation

Esra Nur Uğurlu

Supervisors: Peter Skott (University of Massachusetts Amherst) Dany Lang (Université Paris 13) Eckhard Hein (Berlin School of and Law)

Matrikel Number: 449713 Numéro d’étudiant: 11409691 E-mail: [email protected] Submitted on: 14.06.2016

Table of Contents

1. Introduction ...... 1

2. Methodology and Proceeding ...... 4

3. The Benchmark Kaleckian Model ...... 5

4. Critiques on the Kaleckian Models and the -led Growth Literature ...... 9

5. Introducing Labour Markets into the Benchmark Kaleckian Model ...... 15

6. Empirical Section ...... 21

6.1 Survey of the Empirical Literature ...... 21

6.2 Data and Stylized Patterns ...... 30

6.3 Estimation Methodology ...... 33

6.4 Estimation Results ...... 36

6.5 Interpretation of the Results and Directions for Future Research ...... 40

7. Conclusion...... 42

I. Definitions of the Variables and Parameters used in the Model ...... 45

II. Definitions of the Variables and Parameters used in the Empirical Section ...... 46

III. List of Abbreviations ...... 46

IV. List of Figures ...... 46

V. List of Tables...... 47

VI. List of References ...... 48

VII. Appendix ...... 55

1. Introduction

The relationship between , and growth has been a major theme in different heterodox school of economics for several decades, especially in the post-Keynesian and neo- Marxian traditions. Within the post-Keynesian tradition, the discussion has mainly focused on functional income distribution with a great emphasis on the wage- and -led economies distinction. In a nutshell, this terminology suggests that if distribution of income towards wages (profit) leads to an increase in growth in a country, the economic regime of this country is said to be wage- (profit-) led.

In the literature, this theoretical possibility is analyzed by using a version of the neo- Kaleckian model. This model was initially presented by Kalecki (1954) and Steindl (1952), later formalized by Rowthorn (1977), Dutt (1984) and modified throughout time by Taylor (1983, 1990, 2004), Amadeo (1986), Kurz (1990) and Bhaduri and Marglin (1990). The seminal paper by Bhaduri and Marglin (1990) was the first study that showed the possibility of different regimes of accumulation using the labels of stagnationist and exhilarationist. Later on, Taylor (1991) has introduced the terminology of wage-led and profit-led economies. Since then, the neo-Kaleckian benchmark model has been extended in many directions, such as open economy extensions by Blecker (1989), inclusion of financialisation variables by Lavoie (1995), Hein (2006, 2007) and Stockhammer (2004, 2008), productivity channels by Naastepad and Storm (2007, 2010), introduction of a government sector and explicit analysis of policy issues by Lima and Setterfield (2008) etc. (Hein, 2014, p.241) and (Nikiforos, 2014, p.1)

This distinction has also inspired a huge amount of econometric studies1 that seek to identify whether economies are wage-led or profit-led. However, as Blecker (2015, p.1) argues this vast empirical literature could not reach a consensus for many countries, including some of the largest ones such as the US, Japan and various EU members. Because of absence of a consensus on the empirical conclusions, and also independently of this, several scholars have developed different critiques on the Kaleckian models in general as well as on the wage- led growth literature.

The major critique on the Kaleckian models questions the relevance of the Keynesian stability condition in the long-run and draws attention to the Harrodian instability, which

1 For instance; Onaran and Galanis (2012); Stockhammer and Onaran (2004); Hein and Vogel (2007, 2009); Stockhammer and Ederer (2008); Hein and Tarassow (2009); Stockhammer, Ederer and Onaran (2009); Stockhammer, Hein and Grafl (2011)

1 might similarly arise in the medium to long-run (for instance; Skott 2008, Allain 2015a). In the literature, the latter point is linked to the critique of the treatment of the rate of as an endogenous variable by Kaleckians. It has been argued that even though the rate of utilisation can move away from a normal (or desired) rate in the short-run, there ought to be some mechanisms that could bring the actual rate to the normal rate in the medium to the long-run. As it will be discussed in more detail in the following sections, the main advocates of this position question the usefulness of Kaleckian models in general, as Harrodian models that are capable of incorporating such instability dynamics are considered to be superior by these authors.

In addition to this long standing debate, which has been more broadly directed against the Kaleckian models in general, the wage-led growth literature has also been exposed to some other criticisms, which essentially argue that the distinction between wage-led and profit-led regimes is not as simple as it appears in the basic post-Kaleckian models. For instance, Palley (2013, 2014) argues that the literature on wage-led vs. profit-led growth suffers from the post-Keynesian version of the ‘Lucas critique’ since the econometrically defined character of an economy depends on policy rather than its natural characteristics. Blecker (2015) draws attention to the lack of time dimension in this literature. He argues that given the heterogeneous effects along the time dimension of the functional income distribution on different components of , there is a possibility that an economy can be characterized by different regimes in the short and the long-run2. Another important critique to this literature relates to the lack of attention to the non-linear and two- way causal relationship between distribution and growth. This issue has been raised by several authors (such as Taylor 2004, Nikiforos and Foley 2012, Skott 2015, Blecker 2015) and pointed out as a cause for significant identification problem for econometric analysis. Another major critique, which is pointed out by several authors such as Hein and Vogel (2008), Blecker (2011) and Skott (2015), underlines the importance of the source of change in income distribution in determining an economy’s regime characterization, which is not taken into account in empirical studies of the wage-led growth literature. Finally, as Skott (2015) argues, absence of any consideration of the labour in the Bhaduri-Marglin model, along with most models in the Kaleckian tradition and as well as in the wage-led literature, constitutes another area for further improvement in the post-Keynesian analysis of income distribution and growth.

2 By the short-run, Blecker (2015, p. 3) refers to a few quarters or years, or the length of an ordinary ; while for the long-run, he refers to periods of one or more decades.

2

All these points have big potentials to trigger new empirical research and to develop the Kaleckians models in a way that they can better reflect different structural features of different countries in question. For this reason, this study aims to provide a more comprehensive overview of the above mentioned discussions in section 4. However, the main focus of this thesis will be on the inclusion of labour markets to the Kaleckians models as suggested by Skott (2015).3 Skott (2015, p.5) argues that leaving out labour markets and labour constraints on the rate of growth might be appropriate for dual economies with significant amounts of hidden or open . However, for ‘mature’4 economies for which (un)employment rate is a meaningful variable- insofar as it influences at least one of the proximate determinants of the growth rate such as firms’ accumulation, pricing and output decisions- the exclusion of the labour market stands out as a potential weakness of the standard Kaleckian models5.

The empirical evidence demonstrates that for most of the time, investment stands out as the most volatile component of aggregate demand with cyclical fluctuations even larger than those of national income (Blecker, 2015, p.14)6. The strong cyclical volatility of investment makes it a crucial task to distinguish between the drivers of the short-term dynamics of investment over a business cycle as well as the determinants of longer-term trends. Besides this, as this thesis intends to demonstrate, when the interactions between the and the labour market are taken into account, the conclusions of the wage-led literature that have been derived by considering one market in isolation might not hold. Given the importance of understanding the nature of long-term dynamics behind investment decisions

3 To our best knowledge, this issue has been recognized in a similar manner only by Robinson (1962), Flaschel and Skott (2006), Ryoo and Skott (2008), Skott and Zipperer (2012) and Skott (2015).

4 As explained in Skott and Zipperer (2012, p. 279) maturity does not imply full employment. The key characteristic of a mature economy is that the (un)employment rate is a meaningful variables, which influences at least one of the proximate determinants of the growth rate. In this sense, economies like the US, Japan and several European economies can be considered as mature since in these economies the long-run growth rate can be constrained by the growth rate of the labour force, even though they may not experience full employment. On the contrary, in dual economies, such as China or India, large reserves of hidden unemployment implies that labour constraints have little or no influence on the ability of the economy to expand output and employment.

5 It is important to acknowledge that some authors in the Kaleckian tradition, such as Palley (1996, 2010), Naastepad (2006) and Hein and Tarassow (2009), also attempted to deal with labour supply constraints through the introduction of endogenous technical progress and productivity growth into Kaleckian models with the assumption that the profit share is affected by unemployment and bargaining power of workers. Even though these models open a way to deal with labour supply constraints, they exclude more direct influences of employment rate on the accumulation, as this study will attempt to provide here.

6 This was also one of the crucial observations about investment dynamics provided by Keynes (1936) in his General Theory of Employment, and .

3 and potential implications of this exercise for the wage-led literature, this master thesis aims to provide an empirical assessment of the relevance of the employment rate in investment decisions in mature economies. The main hypothesis this thesis aims to test posits that in mature economies, the accumulation rate depends inversely on the employment rate insofar as (1) a state of near full employment potentially affects firms’ views on their ability to get the workers they would need to increase future output and hence puts a downward adjustment in the expected growth rate of output, which reduces the need for additions to the capital stock and (2) a sustained increase in employment strengths workers vis-à-vis the management, and resulting increase in workers’ militancy gives rise to higher monitoring and surveillance costs, which leads to an overall deterioration in the business climate and animal spirits along with the traditional Marxian and Kaleckian insights. Therefore, this master thesis tries to answer the following research question: does the employment rate affect the accumulation rate in mature economies in the long-run?

2. Methodology and Proceeding

This thesis tests the hypothesis stated above for the US economy. The main motivation behind selecting the US relates to its mature economy characteristic, which implies that the growth rate can potentially be constrained by the growth rate of the labour force. Secondly, to our best knowledge, there exists only one study by Skott and Zipperer (2010) that estimates a Bhaduri-Marglin type investment function by incorporating the employment rate as one of the explanatory variables for the US economy covering the period 1948-2009. Different econometric techniques employed in this thesis can potentially provide a robustness check for this study. Finally, the availability of long-term time series is another consideration for the selection of the US for our empirical investigation.

The empirical estimation of this thesis applies the Autoregressive Distributed Lag Models (ARDL henceforth) - based bounds testing approach developed by Pesaran et al. (2001). This estimation technique is particularly well suited for our estimation as it does not require any specific identification of the order of the underlying data; that is, the ARDL approach allows a mixture of stationary and non-stationary variables. Some other convenient properties of the ARDL approach such as its ability to overcome correlation and endogeneity problems also makes it a desirable choice for our estimation. In addition, since the ARDL approach is one of the common estimation techniques in the wage-led growth literature, choosing this technique allows making meaningful comparisons with the similar studies in the literature.

4

The rest of this master thesis is organized as follows: the third section introduces the benchmark Bhaduri-Marglin model that constitutes a basis for the studies in the wage-led growth literature. The fourth section presents the main critiques on the theoretical and empirical studies that are based on this model. The fifth section extends the benchmark model introduced in the third section as to incorporate labour markets into the analysis through a slight modification in the investment function. Through the new extended model, this section also discusses the implications of incorporation of labour markets on the conclusions of the wage-led literature that have been derived by considering only the goods market in isolation. The sixth section provides an empirical assessment for the question of whether employment rate is one of the long-term determinants of investment in the US economy. This section also provides an empirical survey, discusses the data-related questions and explains the trends of the data series that are used in the empirical estimation. The last section concludes.

3. The Benchmark Kaleckian Model

The different versions of the Kaleckian distribution and growth models, including the Bhaduri-Marglin model that will be presented in this section, contain the main features of Kalecki’s (1954; 1971) and Steindl’s (1952) approaches towards distribution and aggregate demand (Hein, 2014, pp. 242-245). Perhaps most importantly, in these models, the rate of capacity utilization, which is regarded as an indication of demand, is considered as the accommodating variable, which adjusts to aggregate demand and to investment, both in the short and in the medium to the long-run. Following from the adjustment through capacity utilization, Kaleckian models assume that equilibrium level of utilization diverge from the normal or the target rate of utilization and a tendency towards normal rate of capacity utilization does not exists, as is predominant in the Harrodian and the Marxian approach. As the third distinguishing feature, the distribution of income (in sectors like manufacturing, construction, transportation and services) is determined by mark-up pricing on marginal costs, which are assumed to be roughly constant up to full capacity, with the mark-up being determined by the degree of , the relevance of relative to other forms of competition, overhead costs, and the bargaining power of unions (ibid., pp. 183-192). The Benchmark Bhaduri-Marglin model, whose main assumptions have just been underlined, can be presented with the following set of equations7:

7 The model presented in this section is largely based on Hein (2014). Note: We intend to visualize the relationships given by this model and its labour constrained extension, which will be introduced in section 5, with the help of flow charts in the appendix.

5

Equation (3.1) decomposes the (r) into two components that are profit share (h) and capacity utilization (u), where Π, Y,K, w and a denotes the level of total gross profits, real output, the capital stock, nominal wage rate and labour-output ratio respectively. Assuming a fixed coefficient , the output-capital ratio (Y/K) can be used as a measure of capacity utilization. Hence, the rate of profit is given by:

Π Π ( .1)

The pricing equation can be written as:

( .2) ,

where (p) are determined by the mark-up (m) pricing of firms in incompletely competitive goods markets over unit costs. Here, since we assume away material costs and other overhead costs, firms only apply the mark-up on unit labour costs. The mark-up determines the profit share as shown in equation (3.3):

Π ( . )

Equation (3.4) representing the macroeconomic saving rate demonstrates that the saving rate depends positively on the saving ratio out of profits, the profit share and the degree of capacity utilization.

Π ( .4) Π Π Π Π

As can be seen from equation (3.5), the Bhaduri-Marglin investment function, is given as a function of animal spirits, capacity utilization and the profit share. The impact of animal spirits can be positive or negative depending on the changes in the political and psychological factors affecting investment decisions such as the general business climate and long-term expectations. The positive effect of increasing capacity utilisation, which is known as the standard accelerator effect, implies improvements in the relation between expected sales and productive capacity (Hein and Vogel, 2007, p.7). Finally, an increase in profit share represents improvement in internal means of finance for investment, ceteris paribus, which also provide access to external means of finance in incomplete financial markets, and hence positively affects investment. Considering the profit share as a proxy for expected profitability also explain the partial positive impact of rising profit share on investment.

6

( .5)

Equation (3.6) gives the net accumulation rate where represents the rate of depreciation.

Equation (3.7), which gives the equilibrium condition in the goods market, indicates that the saving rate is equal to the accumulation rate and output is equal to aggregate demand in the goods market.

( .7)

The adjustment that brings us to the equilibrium takes place through changes in the rate of capacity utilization in the standard Kaleckian models. To ensure the stability of the equilibrium, saving decisions should react more than investment decisions to changes in the capacity utilization. This condition, known as the ‘Keynesian stability condition’ is presented in equation (3.8):

( . ) Π

After presenting the basic equations of the model, the equilibrium values of our parameters can be obtained by solving the model. By plugging equations (3.4) and (3.5) into the equilibrium condition in equation (3.7), the equilibrium rate of capacity utilization u* can be obtained as follows:

( .9) Π

Inserting u* into equation (3.6) provides us with the equilibrium of the net capital accumulation rate g*:

( .1 ) Π Π

Similarly, inserting equation (3.9) into equation (3.1) gives the equilibrium profit rate r*:

( .11) Π

Equations (3.12)-(3.14) indicate the effect of a change in the profit share on the equilibrium rates of capacity utilization, capital accumulation and the profit rate as follows:

7

Π Π ( .12) Π Π

Π Π ( .1 ) Π Π

( .14) Π Π

In all equations, the total effect depends on the behavioural parameters of the functions. For instance, in equation (3.12), the total effect of an increase in the profit share on capacity utilization depends on individual effects of a change in the income distribution on consumption and investment. If sensitivity of investment with respect to the profit share ( is high and the propensity to save out of profits Π is low, the expansionary effect of an increase in the profit share over-compensates the contractionary effects on consumption and hence the economy would be characterized by profit-led regime (exhilarationist). On the contrary, if increase in the profit share only has a weak effect in stimulating investment and the propensity to save out of profits is high, the total effect on capacity utilization can turn out to be negative and the demand regime is characterized as wage-led (stagnationist). From the

Keynesian stability condition, it is given that: Π . Therefore, mathematically profit- led demand regime is obtained when . Π

Likewise from equation (3.13), with strong partial effect of the profit share and the weak partial effect of the capacity utilization, a higher profit share can have positive impacts on equilibrium rate of capital accumulation and hence growth becomes profit-led. In the reverse case, weak effects of the profit share on investment and strong effects of capacity utilization can have dampening effects on equilibrium rate of capital accumulation and growth becomes wage-led.

Similarly, equation (3.14) reveals that the effect of redistribution on the equilibrium rate of profit is ambiguous. If the partial effect of a rise in the profit share on investment is high and the propensity to save out of profits is low, an increase in the profit share may result in higher profit rate. In the reverse constellation with weak partial effects of higher profit share on capital accumulation and higher propensity to save out of profits, higher profit share may dampen the equilibrium rate of profit.

8

After presenting the main features of our benchmark Kaleckian model to lay the groundwork for the subsequent discussions, the next section will present the major critiques on the Kaleckian models and the wage-led growth literature.

4. Critiques on the Kaleckian models and the wage-led growth literature

As it has been explained in the previous section, Kaleckian models are characterized by the low sensitivity of accumulation to variations in the capacity utilization, and with a given level of mark-up, the utilization rate becomes the accommodating variable, which does not show any tendency to converge to a normal rate. In the literature, these two intrinsic properties have been underlined as the major drawbacks of the Kaleckian models by some authors writing in the Harrodian and the Marxian tradition such as Committeri (1986), Auerbach and Skott (19 ), Duménil and Levy (1995).

According to Harrod (1939), when entrepreneurs observe under or over-utilized capacities, they adjust their capital accumulation accordingly to a normal (desired) rate. However, this adaptive behaviour triggers a growing difference between the actual and the warranted rate of growth, which is defined as the growth rate at which all at desired utilization level are absorbed by investment For instance, if the actual rate of capacity utilization is consistently higher than the normal rate, this implies an actual growth rate that is consistently above the assessed secular growth of sales. Entrepreneurs react to this divergence by making a new assessment of the trend growth rate of sales, which is higher than the previous level. As a result, they further increase the investment and drive the economy into instability, which is referred as Harrodian instability in the literature. (Allain, 2015a)

Skott (2008a, p.1) argues that low sensitivity of accumulation to variations in the capacity utilization, which manifests itself in the Keynesian stability condition, is introduced primarily for the instrumental purposes into the Kaleckian models as the stability is seen as required by Kaleckians for the real world relevance of their models. In an alternative Harrodian approach, where the distinction between the short and the long-run sensitivity of investment to changes in aggregate demand plays a key role, insensitivity of investment to changes in utilization in the short-run is argued to be plausible; however, the lagged effects of changes in aggregate demand on investment suggest more substantial impact of the long-run changes in aggregate demand on accumulation (ibid., p.5f). With regard to the convergence of the capacity utilization to its normal level, the Harrodian approach argues that demand expectations may not be easily met and hence actual capacity utilization can deviate from its desired rate in the short-run; however, in the long-run, firms, whose primary objective is to

9 maximize profits, adjust the utilization rate to its normal level (ibid.). For these reasons, the standard Harrodian investment function relates ‘the changes in the rate of accumulation’ to the difference between the actual and the desired rate of capacity utilization.8 This specification is illustrated by Skott with the following equations in a discrete time and a

continuous time respectively: and )

The arguments for the non-stationarity of the utilization rate and the low sensitivity of investment to changes in utilization (compared to that of saving) implied by the Kaleckian models have been challenged on the empirical grounds as well. For instance, Skott (2008b, p.12) compares the implications of a benchmark Kaleckian model with the US manufacturing industries capacity utilization data. In order to mathematically illustrate the Kaleckian case, he inserts some stylized values into the parameters of a benchmark Kaleckian model9. His numerical example illustrates that shocks to the saving function gives rise to fluctuations in capacity utilization that are at least ten times larger than those in accumulation in a Kaleckian model. For Skott, these implications do not fit with the data, which exhibits expected large fluctuations in the short-run but maintains a relatively stable trend over a longer period of time10 (as can also be seen from figure 4).

In order to defend the Kaleckian models against these criticisms, Kaleckian authors have developed several responses. One broad group of authors denied the relevance of this critique on the grounds that Kaleckian authors in general do not have a long-run steady state in mind insofar as the economies are exposed to different types of shocks, to which possible adjustments are never completed (Hein et al, 2012, p.145f). Secondly, it has been argued that the notion of normal rate of utilization should be defined more flexibly as a range of values rather than as a single value11 (ibid.). According to this view, a firm can have more than one target rate of capacity utilization, which may be mutually exclusive, so that the adjustment of the economy towards a predetermined normal rate is not expected in the long-run. As the third

8 For simplicity, the potential impacts of profitability or the employment rate are ignored in these equations.

9 In Skott’s example, the gross savings rate out of profits ( ) is expected to fall in the range of 0.15-0.3 and the technical output-capital (v) ratio is expected to be in the range of 1-3. In a situation where ( )v=0.12, the of investment with respect to capacity utilization is equal to 0.08 and the coefficient representing animal spirits is given by 0.03, Kaleckian model yields an equilibrium utilization rate of 0.75. When a case in which savings rate drops from 0.12 to 0.11 is assumed, the growth rate increases by 2 percentage points, whereas the capacity utilization increases from 75% to 100%.

10 Over the course of several business cycles or decades

11 According to Hein et al. (2012), this argument has been pointed out for example by Dutt (1990, pp.58-60) and Lavoie (1992, pp. 327-332).

10 alternative, some Kaleckian authors suggested different mechanisms through which the Harrodian principle of dynamic instability gets tamed, such as the existence of non-capacity creating autonomous expenditures (such as Lavoie 2015, Allain 2015b) or the introduction of endogenous adjustment of the target rate through hysteresis effects (such as Lavoie 1996, Dutt 2009). In those studies, Kaleckian authors have shown that Keynesian results still hold despite the actual rate of capacity utilization being brought back to its normal level.

The responses by the Kaleckian authors have been both welcomed and also been subject to new criticisms in the literature by the authors writing in the Harrodian tradition (for instance, see Skott 2016). Even though a more complete examination of this discussion is beyond the scope of this study, some important implications can be derived from this discussion, which in particular relate to the estimation of a Kaleckian type investment function. First of all, from the point view of this study, the entrepreneurs’ reaction to under or over-utilised capacities that causes Harrodian instability sounds so plausible that it seems very unrealistic to ignore this potential mechanism. Even though this study abstains from holding a strong position in this discussion, it seems crucial to keep in mind that the absence of empirical support –as argued by Skott (2012)- puts the Keynesian stability condition, which is generally extended to long-run, into question. An alternative Harrodian approach seems to be more complex than the standard Kaleckian investment function formulation insofar as the former requires a distinction between the short-run and long-run sensitivity of investment to changes in capacity utilization. Even though it is not the main focus of this thesis, as the ARDL approach allows distinguishing between the short-run and long-run differences in the responsiveness of the accumulation to changes in the capacity utilization, the empirical section of this study will potentially provide some empirical insights into this ongoing discussion.

Apart from the Harrodian critiques, which have been directed against the Kaleckian models in general, the wage-led growth literature has been exposed to some other critiques mostly by the scholars working on the Kaleckian models, on the grounds that the distinction between wage-led and profit-led demand regimes is not as simple as it appears in the basic post-Kaleckian models, which tend to neglect some crucial dimensions. One of these dimensions relates to the endogeneity of growth regimes with respect to policy interventions. Even though this aspect was already introduced in the seminal paper by Bhaduri and Marglin (1990) (through the discussion of the US economy, for which authors argue a movement from a wage-led regime towards a conflictual wage-led regime after the and then

11 towards a profit-led regime at the end of the Golden Age), this critique has been largely absent in the literature until two recent studies by Palley (2013, 2014).

Palley argues that the literature on wage-led vs. profit-led growth suffers from a post- Keynesian version of the ‘Lucas critique’ insofar as the econometrically defined character of an economy depends on policy rather than its natural characteristics. In order to demonstrate how wage- vs. profit-led character of countries can be influenced by their respective economic policies, Palley introduces personal income and wealth distribution into a benchmark Kaleckian model by distinguishing between two classes: capitalist managers and workers. Palley’s analysis implies that pre-policy data cannot be used to determine the economic regime of a country since agents’ behaviour is subject to changes as a response to new policies. Therefore, in his framework, characterization of an economy depends on distribution and fiscal policies as well as changes in the financialisation variables.

As an example, when workers’ ownership increases, the tendency of the growth regime would be to shift from wage-led to a profit-led character as higher profit income to workers decreases aggregate saving. Palley (2014) also analyzes implications of several fiscal and financialisation policies such as reduction in different tax rates and increase in the payout ratio in terms of determining a country’s regime characterization. In essence, he argues that the policies of the last two decades made economies appear more profit-led by lowering wage shares and tax rates on shareholder income. Using the standard terms of the literature, Palley (2014, p.27) reaches the conclusion that “increasing the workers share of the wage bill unambiguously increases growth and capacity utilization regardless of whether the economy is wage-led, profit-led...”. Carvalho and Rezai (2014) empirically test this argument and conclude that the deterioration in personal income inequality after 1980 has transformed the US economy into a more profit-led growth regime.

In a somewhat similar paper, Nikiforos (2014) presents other endogenous mechanisms through which an economy goes through phases of wage- and profit-led growth. In his model, these swings occur due to the effects of changes in the income distribution on the propensities to invest and save out of profits, the two important parameters that typically define an economy’s characteristic in a standard post-Kaleckian model. With regard to the effect on the propensities to invest, Nikiforos argues that in the long-run, it depends negatively on the changes in the profit share (ibid. p.8). By referring to Keynes (1936), the author argues that “past and present profitability provide the basis for the formation of the expectations of the entrepreneurs”, which plays a crucial role in the formation of investment decisions. In his

12 view, current profitability loses its importance while other considerations (such as the limited size of the market) become more important in the investment decisions after a certain point of a rise in the current profitability. Therefore, Nikiforos argues that, in the long-run, as the profit share rises, the effect of profitability on investment weakens, which is reflected in a decrease in the propensity to invest out of profits12.

As for the propensity to save, again by referring to Keynes (1936, chp.3), Nikiforos argues that propensity to save increases as the profit share increases. When these two effects are combined, this analysis suggests a movement of an economy towards a more wage-led direction as the profit share rises. Therefore, contrary to Palley’s main conclusion, which underlines the importance of pursuing pro-wage policies regardless of an economy’s defined character, Nikiforos (ibid. p.2) argues that “the pursuit of distribution-led growth contains the seeds of its own destruction”. His analysis suggests paying more attention to possible changes in the relation between distribution and growth in the empirical estimations.

Blecker (2015) presents another important critique to the majority of the studies in the literature that do not give enough attention to the time dimension of the wage-led vs. profit- led distinction. Blecker argues that “ [given] the relative magnitudes of the effects of income distribution on the components of aggregate demand (consumption, investment, and net exports) are likely to vary depending on the length of the time horizon considered, economies can be characterized by different regimes in the short and long run” (ibid. p.3). More specifically, he argues that “the positive effects of higher profit shares (or lower labour costs) on investment and net exports are mainly short run phenomena, while the sensitivity of workers’ consumption to their wage income is, if anything, likely to be stronger in the long run.” (ibid). For this reason, for Blecker, demand is more likely to be profit-led in the short- run while it is more likely to be wage-led in the long-run. Using some simple correlation analysis, Blecker (ibid. p.23f) attempts to support this argument by illustrating the possibility for the existence of different economic regimes in the short-run and long-run for the US economy. Even though this study is very innovative and stimulating, insofar as few studies have focused on identifying long-run effects of distribution on demand and growth so far, it fails to support the main hypothesis with strong empirical evidence- as also acknowledged by Blecker himself.

12 It is important to note that this paper fails to distinguish between microeconomic and macroeconomic effects of the profitability on investment. For instance, it is not so clear if the author discusses the importance of internal finance or the limited size of the market from a micro or macro point of view.

13

Another debatable point in the wage-led literature relates to the treatment of income distribution as an exogenous variable in most of the Kaleckian models. Although the Kaleckian tradition provides an elaborative theory of income distribution, the majority of studies in this literature do not deal with the feedback effects of aggregate demand, capital accumulation and growth on income distribution. This practice has been generally justified on the grounds that treating income distribution as exogenous variable helps to keep models as simple as possible given the fact that a single and straightforward way to deal with these feedbacks effects does not exist (Hein, 2014, p.478). However, several studies such as Taylor (2004), Nikiforos and Foley (2012) and Skott (2015) argue that the presence of two-way relation between distribution and growth is likely to create important identification problems both for theoretical and econometric analyses.

For instance, Nikiforos and Foley (2012, p.21 ) state that “[t]he simultaneous determination of distribution of income and capacity utilization means that there is not a clear-cut causal relationship between them. There are channels through which the causality runs from distribution to capacity utilization, while there are others through which the causality runs from the other way.” In a similar vein, to demonstrate the difficulties in achieving reliable econometric evidences in determining wage- or profit-ledness of an economy, Skott (2015, p.10) argues that “...the presence of a two-way relation between aggregate demand and income distribution complicates any attempt to draw causal inference from reduced-form correlations between and the distribution of income.” Therefore, suggesting a unidirectional causality from distribution to aggregate demand might cause a misleading terminology while in fact distribution is directly affected by the shifts in aggregate demand. Also, assuming away the causality from aggregate demand to distribution is likely to result in obtaining biased econometric estimations.

In addition to the implications of treating income distribution as a policy variant variable, the potential impacts of different exogenous shocks that affect income distribution with respect to regime character of economies are also discussed in the literature by several authors such as Hein and Vogel (2008), Blecker (2011) and Skott (2015). For instance, Skott (2015, p.9f) analyzes two different cases, in which the wage share is influenced either through a change in the bargaining power of workers or through a change in competition policies, which would affect firms’ pricing behaviour and hence mark-ups. Under the first scenario, in addition to its effects on the wage share, higher bargaining power of workers would influence the investment decisions through its effects on business climate and hence animal spirits.

14

However under the second scenario, changes in the competition policies are less likely to influence other parameters or the functions of the same model. This implies that the precise manner in which distribution is changed would have different effects on distribution and utilisation, leading the same country to exhibit wage-led behaviour in response to one type of shock and profit-led in response to another. According to Lavoie (2014, p.536) even though this possibility is acknowledged in the theoretical literature, the source of change in income distribution has not yet been taken into consideration in the empirical studies.

Finally, Skott (2015) discusses and criticizes the exclusive focus paid to the goods market in the Kaleckian models. Skott states that “...when the interactions across markets is taken into account, conclusions that have been derived by considering one market in isolation may no longer hold.” (ibid. p.8) More specifically, as we will intend to demonstrate in the following section, Skott argues that taking the interactions between labour and goods market into account changes the conditions for wage-led growth.

All these points underlined above have their own merits and they are not mutually exclusive. Even though the additional layers of complexity emphasized in all these studies have important implications for empirical studies as well as for the design of macroeconomic policies, the focus of this study will be exclusively on the labour markets aspects as discussed by Skott (2015). In this direction, the next section attempts to incorporate labour markets into the benchmark Bhaduri-Marglin model presented in section 3.

5. Introducing labour markets into the benchmark Kaleckian model

In addition to the three main features of the Kaleckian models, underlined at the beginning of section 3, most Kaleckian models assume dual economy conditions with a perfectly elastic supply of labour to the capitalist sector of the economy (Ryoo and Skott, 2008, p.358). The following quote from Hein (2014, p.242) thoroughly summarizes this assumption:

“[In different variants of the Kaleckian distribution and growth models] [l]abour supply is not a binding constraint for output and growth, and unemployment is a persistent feature of modern capitalist economies, both in the short and in the long run. Therefore, full employment is an exception and even if it is achieved, effective labour supply is endogenous to aggregate demand, growth and hence labour demand through various channels: participation rates, minimum and maximum working ages, migration and finally also labour productivity growth.”

15

One of the criticisms raised against the Kaleckian models, which is linked to this assumption, points out the absence of consideration of labour markets in the standard Kaleckian models. For instance, Ryoo and Skott (2008, p.357) and Skott (2015, p.12) argue that even though it might be reasonable in some contexts, such as in the discussions that relate to many least developed or developing economies that are characterized by the presence of internal reservoirs of underemployment, this assumption is questionable for many developed countries with (near-) full employment. Skott (2015, p.3) argues that in mature economies, for which the unemployment rate influences at least one of the proximate determinants of the growth rate such as firms’ accumulation, pricing and output decisions, the long-run growth rate might be constrained by the natural growth rate n, whose value may depend on the employment rate amongst other variables.

With regard to elasticity of labour supply, Flaschel and Skott (2004, p.327) acknowledge that up until the 1960s, the supply of labour to the modern capitalist part of the economy was quite elastic in most of the OECD countries as they had hidden reserves of unemployment in agriculture, in parts of the sector and among women and also immigration helped to alleviate any of labour13. However, in time the hidden reserve army gradually became depleted and immigration was hampered by growing political resistance (ibid.). As a result, some developed economies became ‘mature’ in Kaldor’s (1966) use of the term as the growth in the labour force became a binding constraint on growth.

In order to understand the adjustment of the growth rate to the natural rate in the long- run, it is important to discuss how one can establish a floor and a ceiling for the growth rate. As acknowledged by Skott (2015, p.5f), the growth rate can stay below the natural rate as long as there is no policy intervention, leading to ever increasing unemployment. As for the ceiling, assuming a fixed coefficient production function, output is constrained by the labour supply (in efficiency units) in the long-run insofar as firms cannot keep investing in more capacity if they cannot find workers (ibid.) Following Ryoo and Skott (2008), Skott and Zipperer (2012) and Skott (2015), this situation will be incorporated into the benchmark model with a minor modification in the investment function, while the model retains other

13 Toniolo (2003) argues that abundant labour was one of the favourable supply side factors that reinforced higher investment rates during Europe’s golden age between 195 and 197 by allowing easy reallocation of manpower to technologically advanced industries. In a similar vein, Kindleberger (1968) argues that an elastic labour supply, by favouring profits, allowed sustaining unusually high investment rates during Europe’s post-war growth years. These points support the argument that the elastic supply of labour favoured growth in most of the OECD countries up until the 1960s, and experienced a reverse trend afterwards, which corresponded to the changes in the political circumstances and the end of the Golden Age.

16 main assumptions of the benchmark model. For convenience, we will firstly present the first three equations of the model, which are retained unchanged in this model.14

(5.1)

(5.2)

(5. ) Π Π

(5.4)

Equation (5.4) gives the new investment function with the incorporation of the employment rate into the model. The influence of utilization and the profit share on accumulation is standard as explained in section 3. The coefficient captures the negative effect of employment rate on investment. Two mechanisms can bring these results. Firstly, a high employment rate (a small reserve army of labour) strengthens workers along with the traditional Kaleckian and Marxian insights15. As workers push for wage increases and improvements in non-wage features of the employment relation, the business climate suffers and animal spirits drop. In this sense, the negative impact of higher employment on accumulation decisions reflects Kalecki’s (194 , p.326) insight that

“...under a regime of full employment ... [t]he social position of the boss would be undermined and the self assurance and class consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension...Their class instinct tells them [referring to bosses] that lasting full employment is unsound from their point of view...”

Secondly, a state of near full employment potentially affects firms’ views on their ability to get the workers they would need to increase future output and hence a downward adjustment

14 This model is to a great extent based on Skott (2015).

15 The influence of employment rates on growth and employment can also be analyzed through allowing income distribution to be influenced directly by the reserve army. Examples of this relationship can be found in Goodwin (1967) and Skott (1989). In order not to deviate substantially from the standard Kaleckian framework, this section will continue to take the mark-up as an exogenous variable. For the detailed discussion of determinants of mark-up in the Kaleckian framework, interested reader can refer to Stockhammer (2009) or Dutt (2012).

It is also important to note that the adjustment of the demand determined equilibrium towards the natural rate of growth determined by the labour force growth through the unemployment and bargaining channels is also recognized in the Kaleckian literature (for instance, Hein, 2014, p.479)

17 in the expected growth rate of output reduces the need for additions to the capital stock (Ryoo and Skott, 2008, p.361). The rationale behind this argument is that as the expansion in the economy and rise in the employment rate triggers higher quit rates, the gross recruitment needs and the costs associated with it also increase. At the same time, a high turnover of the labour force during high employment periods enables firms to reduce production without going through large adjustment costs. Overall, high employment rate, by deteriorating the general business climate, affects firms’ expansion plans adversely. In addition to these, as discussed by Ryoo and Skott (2008), the existence of labour shortages might also trigger policy responses in the form of a rise in interest rates and/or contractionary fiscal policies. However, since we attempt to focus on a model representing a pure capitalist economy, which deliberately leaves out public sector and this kind of interventionist policies, these potential mechanisms will be assumed away in our model.

As it has been discussed in Skott and Zipperer (2012, p.296) and Skott (2015, p.6), the effect of employment rate on the accumulation rate is very likely to be non-linear. That is, while a rise in employment from 83% to 84% may have a minimal effect on the rate of accumulation, a rise from 97% to 98% is likely to have bigger impact. For the sake of simplicity, in our theoretical discussion, this non-linearity is assumed away. Later on in the empirical estimation, this non-linear relationship will be accounted for.

As it was in the benchmark model, the net accumulation rate is given by:

By normalizing the labour productivity to one, the employment rate can be written as the product of the rate of capacity utilization and the ratio of the capital stock to the labour force (k=K/N) as shown in equation (5.6):

(5.6)

Equation (5.7) gives the equilibrium condition for the product market; whereas equation (5.8) gives the required equality between the natural rate of growth and the accumulation rate.

(5.7) Π

Π

The Keynesian stability condition is given by:

18

(5.9) Π

Now, equations (5.7) and (5.8) can be solved to obtain the equilibrium values of u and k:

(5.1 ) Π

(5.11) Π Π Π

From equation (5.6), the equilibrium rate of employment is given as:

(5.12 ) Π Π Π Π

(5.12) Π

Equation (5.13) assumes that the natural growth rate depends positively on the employment rate. The underlying mechanism behind this assumption could be due to labour saving technological change or changes in the labour supply as a result of changes in the participation rate, retirement patterns or induced migration.

(5.1 )

Combining equation (5.12) and (5.13), we obtain:

(5.14) e Π

By taking the total derivative of (5.14), the derivative of the equilibrium rate of employment and the accumulation rate with respect to the profit share can be obtained as follows:

e (5.15)

e (5.16)

; where the function and its derivative with respect to e are given by:

(5.17) (e ,h) e Π

19

With equation (5.18), it is assumed that the sign of the with respect to the employment rate is positive. Mathematically, it is possible to see that when the Keynesian stability condition is

satisfied ( Π the condition is met as becomes smaller than one, and it is also Π satisfied in the Harrodian case with ( Π ) and sufficiently small .

(5.1 ) Π

In order to demonstrate how the conditions for the wage-led regime differs in this model compared to the benchmark model, we can examine a simple case where the Harrodian case 16 exists in the long run with Π , and , and . In such a case, the economy is found to be profit-led in the benchmark model as Π and wage-led in the Π

model with labour constraints as .

Therefore, when the labour constraints are introduced into a simple Kaleckian model, the conclusions that have been derived by considering only goods market may not hold any longer. If labour constraints are present, empirical studies that do not take into account the impact of the employment rate on investment are likely to be biased. Even though empirical estimation of investment functions is a challenging task given the amount of several possible influences, some of which are difficult to pin down analytically, in the next section, this study will try to investigate the potential impacts of the employment rate on the investment rate for the US economy.

Before proceeding further, it is useful to briefly mention some critiques on the labour constrained Bhaduri-Marglin model, which are put forward by Hein et al (2011). Hein et al (2011, p.604f) disagree with the claim that falling unemployment rates, which boosts workers’ power, induces individual capitalists to reduce output growth in a capitalist economy, which is characterized by decentralised decision making and a classical competitive environment. Instead, the authors argue that as the unemployment rate declines, consequent improvement in the bargaining power of workers result in higher nominal , which either triggers or a change in the income distribution in favour of workers. According to Hein et al (2011), one of the drawbacks of this model is to ignore these

16 These particular assumptions are chosen to demonstrate the change in the conditions for the wage-led growth in a simple manner.

20 mechanisms, which could have been done by introducing conflict inflation or by endogenizing income distribution.17

The Kaleckian framework provides enough flexibility to introduce conflict inflation, endogenously determined income distribution or endogenized labour force, as suggested by Hein et al (2011). However, in the view of this paper, acknowledging the effects of approaching to a steady state full employment on bargaining power of workers would actually require incorporating the effects of this on the accumulation decisions, if one accepts the repercussions of strengthened workers’ bargaining power on business climate, which are profoundly discussed by Kalecki (1943). In this sense, disregarding this link between employment and investment delivers an incoherent and incomplete picture for countries where effective labour constraints might be relevant. Additionally, even though these amendments put forward by Hein et al (2011) are feasible, following the standard Kaleckian framework as much as possible (by considering an exogenously given income distribution) is, in the view of this study, what facilitates a clear comparison of the implications of the labour constrained model with the benchmark Kaleckian model. In other words, this simple model, by not substantially deviating from the standard Kaleckian assumptions, sufficiently demonstrates the possibilities of obtaining a different demand regime when the labour market is taken into consideration.

6. Empirical Section 6.1 Survey of the empirical literature

After the publication of the seminal paper by Bhaduri and Marglin (1990), voluminous amount of empirical studies seeking to identify growth regimes has emerged. In the ‘structural approach’ branch of these estimations, each component of aggregate demand is estimated separately and the total effect of distribution on output is calculated by adding the individual

17 Hein et al (2011) also discuss the implications of Skott’s model in relation to the Harrodian instability. The authors disagree with the stabilization process proposed by Skott (2015), which gives rise to the limit cycles, on the grounds that when the effect of a change in income distribution in favour of workers is taken into consideration, the resulting boost in aggregate demand further triggers a deviation of the actual rate from the normal rate. For this reason, according to Hein et al (2011), the Marxian labour market mechanism indeed intensifies Harrodian instability rather than containing it. Secondly, the authors criticize the determination of the steady growth path by Skott (2015). For present purposes and given the limited scope of this thesis, we do not go further into the details of this discussion.

21 effects. This subsection will look at the investment function estimations written under this approach and attempt to provide some insights for our empirical estimation.18 Table 1 provides a summary of the empirical studies on the estimation of the investment functions in the wage-led growth literature. One of the observations that can be easily made according to this table is that as the time series estimation techniques have developed over time, especially as the co-integration technique developed by Engle and Grander (1987) became to be more widely used and the bounds testing approach by Pesaran et al (2001) has been introduced, the quality of estimations in this literature have then shown some improvements. For instance, the first study in this empirical literature written by Bowles and Boyer (1995)- although highly appreciated in the literature for being the first attempt to identify economic regimes of countries- has been severely criticized on the grounds that it fails to discuss time-series properties of the variables, such as unit root tests (Stockhammer et al., 2009). Apart from this, the specification of their investment function, which includes the profit rate as a measure of profitability (without taking into account that profit rate is also affected by capacity utilization) and the employment rate as a proxy for the capacity utilisation (without considering the persistence of unemployment in the countries under their investigation), has been pointed out as another major weaknesses of this and some other early studies.

In the later studies, such as in Hein and Ochsen (2003) and Stockhammer (2004), authors improved the estimation techniques by attempting to take care of serial correlation problems by including the appropriate lags of the dependent variables as regressors in the estimation. However, as their results indicate, auto-regressive terms dominate the regression results and results in obtaining coefficients for explanatory variables with very small statistical significance. To address this kind of problems, in the later studies, authors started to apply Error Correction Model (ECM henceforth) or the ARDL approaches.

The second important point this empirical survey reveals is that the majority of the studies in the wage-led growth literature typically find high sensitivity of investment with respect to the different proxies of capacity utilization and low sensitivity with respect to indicators of profitability19 According to Blecker (2015, p.4), the theories of ‘’

18 This empirical survey does not include the empirical studies on the debate about whether the utilization rate should be treated as endogenous variable in the long-run macroeconomic analysis. Interested reader can refer to Lavoie et al (2004), Skott and Zipperer (2010) and Schoder (2011) for the empirical discussion on this topic.

19 In general, the estimations on firm-level investment functions find a larger impact of profitability on investment decisions compared to the literature on aggregate investment functions. (Onaran et al, 2011).

22 capitalism of Steindl (1952) and Baran and Sweezy (1996) provide some insights to explain the limited profitability effects. Accordingly, if a high profit share results from a high degree of oligopolistic pricing power of firms, it generally does not lead to greater investment in the long-run. This is because oligopolistic firms, which keep a certain desired proportion of excess capacity as a deterrent for entry and for other reasons such as uncertainty about demand and indivisibilities, would not want to add additional capacity beyond this desired level simply because they are already earning high profit margins on their current operations. These results seem to hold in the case of the US as well, where authors typically find statistically significant and positive accelerator effect and fail to obtain significant impact of the profit share on investment, with some exceptions such as Hein and Schoder (2011). In addition to the potential impact of the monopolistic structures and sectoral characteristics in countries under investigation, the specifications used in econometric estimations stand out as an important factor affecting the results in this direction. For instance, as noticed by Blecker (2015, p.9), Onaran and Galanis (2012), which estimate investment function in first differences of natural logarithms, find a coefficient of 0.077 on the lagged profit share that is statistically insignificant, while Storm and Naastepad (2012) find a significant coefficient of 0.48 in their estimation of log levels of investment normalized by GDP. This slight difference that yields substantial differences in the estimation suggest that finding appropriate counterparts of the variables used in theoretical models plays a key role in obtaining robust results in the empirical estimations.

In this sense, it becomes crucial to critically analyze the empirical counterparts used in the above mentioned studies. It is easily noticed that most of the studies use the growth rate of real GDP as a proxy for capacity utilization. Even though some authors such as Van Treeck (2008, p.12) and Hein and Oschen (2003, p.419) link this to the absence of uniform and reliable measure of capacity utilisation at the international level, it seems that some other scholars justify this selection with reference to the accelerator theory of investment. For instance, Blecker (2015, p.17) argues that “an empirical investment function that uses u [capacity utilization] as a static proxy for the accelerator effect is likely to be misspecified, because in a true accelerator model the level of investment should depend on changes in output rather than the level of output. Although the use of u to represent the accelerator effect may be justified on grounds of mathematical tractability in a heuristic

According to Onaran et al. (2011), these results seem to be in accordance with the earlier surveys of the literature on investment functions by Chirinko (1993), Bhaskar and Glyn (1995) and Ndikumana (1999).

23 theoretical model, it is almost surely not the best output variable to use in econometric estimation.” (Emphasis in the original)

In order to analyze this argument, it is useful to briefly sketch out the accelerator theory of investment. According to the accelerator theory, when an increase in income results in higher consumption demand, the greater amount of goods would need to be produced. If the existing capital stock is already fully utilised, then this would necessitate more capital. Assuming a constant capital-output ratio, the equation below demonstrates the required amount of capital (desired capital stock) to produce output at time t. In other words, the equation implies that the desired capital stock would be proportional to the level of output.

Assuming away depreciation, a one period adjustment of capital stock to the desired level can be represented by:

Given that represents the investment in that year, equation (6.1.2) can be written as:

Hence, v represents the magnitude of the accelerator. Based on equation (6.1.3), Blecker argues that empirical studies should assess the impact of changes in output, rather than the level of output, on the level of investment. However, Blecker’s suggestion hinges on some theoretically and empirically unsound assumptions, which are widely covered by Kaldor (1951) in his review of Hick’s (1950) book. The fundamental criticism of the accelerator principle by Kaldor relates to the consideration of the capital-output ratio as a constant coefficient. This assumption presupposes the absence of excess capacities in consumer goods industries. However, Kaldor demonstrates that industries that are subject to cyclical fluctuations prefer to maintain excess capacity in plant and equipment as a normal routine. This means that if some machinery is already lying idle, producers would try to use them before rushing in for new equipment. Secondly, the accelerator principle presupposes permanent increase in the consumer demand (Eckaus, 1953). However, in reality uncertainty of producers regarding permanency of an increase in demand leads to unwillingness to undertake capital expansion. Thirdly, the irreversibility of investment due to the lack of second hand markets for most of the investment goods makes it costly or even impossible to adjust the capital stock continuously in response to changes in output and demand (Skott,

24

1989). In addition, the limitations imposed by the problems of financing additional capital requirement prevent smooth and continuous adjustment of the capital stock. Given the amount of theoretical pitfalls, it comes no surprise that the empirical evidence does not largely support the accelerator principle either (Eckaus, 1953).

Another argument Blecker (2015, p.17) is making about the choice of empirical counterparts relates to the use of profit share in the empirical estimations. Blecker argues that profit share is not a good measure of profitability to use in an empirical investment function insofar as business firms and their lenders care about profits relative to the value of the firms’ capital stock, not as a share of the value added. On this matter, Blecker fails to distinguish between the investment function of an individual firm and an aggregate investment function. Even though this argument might be valid for an individual firm, there does not seem to be any valid reason to rule out the possibility of using the profit share either as a proxy for expected profitability or as a means to obtain external finance in the estimations of an aggregate investment functions. The mentioned drawbacks of the accelerator theory of investment, which inform some authors in the Kaleckian tradition to use the growth rate of GDP as a proxy for capacity utilization, and the lack of sound arguments against using the profit share as a measure of profitability suggest that capacity utilization and profit share data is actually plausible and desirable to use in an empirical estimation.

Before proceeding with our empirical estimation, it is useful for our purposes to discuss the short-run and the long-run distinctions with regard to investment, which has been emphasized both in the Harrodian critiques and also by Blecker (2015). As previously mentioned in section 4, Blecker (2015, p.17) argues that profitability effect operate only over the short-run cycles, while longer-term variations in investment rates are driven mainly by the accelerator effect as firms intend to increase their capital stocks based on the expected future demand. Referring to Chirinko et al. (2011), Blecker argues that once the level of profits enable firms to overcome financial constraints, higher profits will not result in additional investment beyond what is found to be necessary by firms satisfying the expected output growth. Blecker supports this argument by showing the trend of the ratio of investment to profits, which does not indicate a strong tendency of the former to follow the latter in the long run (see figure 1). In this sense, it becomes important for our task to clearly distinguish between the role of profitability in driving investment in the short and the long-run.

25

Figure 1: The ratio of investment to profits

Source: Blecker (2015, p.36, figure 2)

It is important to note that the studies mentioned above do not include control variables for labour markets (except for Skott and Zipperer 2012). If labour constraints, indicated through the employment rate, have an effect in investment behaviour in what we define as mature economies, some of the results summarized above might be biased. To our best knowledge, the only estimation that attempts to estimate a Bhaduri-Marglin type investment function by incorporating the employment rate as one of the explanatory variables is provided by Skott and Zipperer (2012). In this study, authors focus on the US manufacturing industry by using both quarterly and annual data covering the period 1948- 2008. In order just to focus on the deviations of the variables from their long-term trends, the authors smooth the series using Hodrick-Scott (HP) filter. In general, their estimated accumulation functions have a very low short-run sensitivity to changes in capacity utilization; therefore it satisfies the Keynesian stability condition in the short-run; however, the long-run sensitivity exceeds any plausible value of the sensitivity of the long-run saving capital-output ratio. With regard to the sensitivity of investment with respect to changes in the profit shares and the employment rate, quarterly estimation finds statistically significant negative impact of employment and positive impact of profit share; whereas annual estimation indicates no statistically significant impact of employment and significant positive impact of the profit share.

26

Table 1: Overview of Empirical Studies on Investment Function Estimations, Author’s own illustration Authors Countries/ Technique Empirical Specification Results Period covered applied Bowles and Boyer (1961-1987) OLS Dependent variable (1995) AR(1) Investment/Capital stock adjustments Independent variables Profit rate Employment rate (as a proxy for capacity utilization) Hein and Oschen Germany OLS Dependent variable (2003) (1961-1993) AR(1) the growth of the real gross capital stock in the private Positive effects of GDP growth adjustments sector No significant impact of the profit The USA Independent variables share (1962-1995) the growth of real GDP (as a proxy for capacity Significant negative impact of the utilization) in Germany, no effect in profit share the US real long term interest rate Stockhammer (2004) Germany OLS with Dependent variable For US, neither capacity utilization (1963-1990) AR(1) The growth rate of business capital stock nor the profit share is significant and the USA adjustments, Independent variables For Germany, small and positive 20 ADL Gross profit share in the business sector effect of the profit share and positive De-trended capital productivity in the business sector effect of capacity utilization (as a proxy for capacity utilization) No significant impact of interest plus Interest and dividend income received by non- dividend income in either of countries financial businesses divided by their value added Naastepad and Several OECD OLS Dependent variable Positive impact of the profit share Storm (2007) countries AR log(I/Y) No statistically significant impact of (1960-2000) ARIMA Independent variables real GDP adjustment Lagged log value of profit share Lagged log value of real GDP ( as a proxy for capacity utilization)

20 ADL and ARDL are used interchangeably in the literature.

27

Hein and Vogel Several OECD ECM Dependent variable In general, positive effects of output (2007) countries ADL Real gross formation growth (1960-2005) Independent variables Insignificant or negative effects of the Log of real GDP (as a proxy for capacity utilization) profit share Profit share For the USA, no significant effect of Real interest rate the profit share Stockhammer et al Euro Area ECM Dependent variable (2008) Real private investment Significant positive impact of demand Independent variables Marginal effects of profitability Change in natural logarithm of real GDP (as a proxy for capacity utilization) Change in natural logarithm of real profits Long term real interest rate Van Treeck (2008) The USA, ARDL Dependent variable France, Rate of growth of business capital stock Significant negative effects of interest Germany, the Independent variables and dividend payments, UK Profit share in the business sector Positive effect of GDP growth (1965-2014) Growth rate of real GDP (as a proxy for capacity No effect of the profit share utilization) Interest/capital ratio Dividend/capital ratio Hein and Vogel France and ADL Dependent variable (2009) Germany ECM Real gross fixed capital formation Positive effect of GDP growth Independent variables Weakly significant positive effects of Log of real GDP ( as a proxy for capacity utilization) profitability Profit share Onaran et al (2011) 1962-2007 ECM Dependent variable The USA Change in log gross private domestic investment Positive effect of the non-rentiers’ Independent variables profit share Log of gross operation surplus (rentier and non- Negative impact of the rentiers’ profit rentier) to GDP share Lagged value of log GDP Positive effect of GDP Autoregressive terms

28

Onaran and Galanis Several ECM, Dependent variable (2012) developed and difference Log of real private investment Strong and significant accelerator developing form Independent variables effect economies Log of real GDP (as a proxy for capacity utilization) Only in the US, the profit share has no Log of agricultural real GDP significant impact Log of profit share Hein and Schoder The USA ADL Dependent variable (2011) Germany Growth rate of the real net capital stock Positive effect of capacity utilization, Independent variables positive effect of the profit share, The ratio of net domestic income to the real net statistically significant negative capital stock , HP filter applied impact of net interest payments Profit share Net interest payments The rate of net dividend payments Skott and Zipperer The USA OLS to the Dependent variable Low short run sensitivity to changes (2012) (1948-2008) HP-filtered The growth rate of FED manufacturing index for in capacity utilization data quarterly data Quarterly data: The growth rate of corporate non-financial business Significant negative impact of the capital stock employment rate Independent variables Positive impact of the profit share Profit share Yearly data: Capacity utilization No significant impact of employment Employment rate Significant impact of the profit share

29

6.2 Data and Stylized Patterns

One of the main problems in the empirical research relates to finding appropriate counterparts for the variables in the theoretical functions. The selection of the data used in this analysis is shaped primarily by the precise purpose of our analysis as well as the limitations on the existence of data and the requirements for the econometric techniques. For instance, since the main aim of this study is to test for the relevance of the employment rate in investment decisions in the long-run, obtaining long-term series is an important criterion behind the country and data selection of this empirical investigation.

To approximate for the investment rate, the changes in the capital stock is calculated. Following Skott and Zipperer (2012), the growth rate of industrial capacity index, which is obtained from the Federal Reserve (Fed)21, is estimated. According to Corrado and Mattey (1997, p.152)22 this index is designed “to embody the concept of sustainable practical capacity, defined as the greatest level of output each plan in a given industry can maintain within the framework of a realistic work schedule, taking account of normal downtime and assuming sufficient availability of inputs to operate machinery and equipment in place”

Figure 2: Investment, the growth rate of FED manufacturing index, in % 2,5

2

1,5

1

0,5

0

-0,5 1949q1 1951q1 1953q1 1955q1 1957q1 1959q1 1961q1 1963q1 1965q1 1967q1 1969q1 1971q1 1973q1 1975q1 1977q1 1979q1 1981q1 1983q1 1985q1 1987q1 1989q1 1991q1 1993q1 1995q1 1997q1 1999q1 2001q1 2003q1 2005q1 2007q1 2009q1 2011q1 2013q1 2015q1 -1

21 Source: Board of Governors of the Federal Reserve System (US), Industrial Capacity: Manufacturing (SIC) [CAPB00004S], retrieved from FRED, Federal Reserve Bank of St. Louis. Note: The following formulation is adopted to calculate the growth rates: , where CI refers to the capacity index.

22 More information on how the Federal Reserve capacity series is constructed can be found from this source.

30

The trend of this data series is given in figure 2. Accordingly, capital accumulation exhibits a declining trend since the early 1960s except for the new economy boom in the 1990s. Over the period of 1948Q1 to 2015Q4, the quarterly growth rate of industrial capacity index averages to 0.77%.

Following Skott and Zipperer (2012), the profit share is calculated by using the surplus and compensation subcategories of quarterly value added, net of depreciation in The Bureau of Economic Analysis (BEA) National Income and Product Accounts (NIPA)23. The data is obtained for the corporate sector. Even though the data selection is restricted by data availability, the use of corporate sector data can be justified on two grounds. Firstly, as also pointed out by Skott and Zipperer (2012, p.3), the share of corporate business sector has increased and stayed around 50 per cent of GDP during the time period under consideration. Secondly, the theoretical function under investigation is believed to reflect corporate sector more than the non-corporate business (ibid.). The formulation used to calculate the profit share is as follows24:

Figure 3: Profit share, in % 40 35 30 25 20 15 10 5 0

1949q1 1951q1 1953q1 1955q1 1957q1 1959q1 1961q1 1963q1 1965q1 1967q1 1969q1 1971q1 1973q1 1975q1 1977q1 1979q1 1981q1 1983q1 1985q1 1987q1 1989q1 1991q1 1993q1 1995q1 1997q1 1999q1 2001q1 2003q1 2005q1 2007q1 2009q1 2011q1 2013q1 2015q1

23 The data can be found under Table 1.14: Gross Value Added of Domestic Corporate Business in Current Dollars and Gross Value Added of Nonfinancial Domestic Corporate Business in Current and Chained Dollars, of NIPA tables.

24 One issue that needs to be raised about the definition of profit share adopted in this study relates to the treatment of executive payment. The measurement applied in this paper fails to adopt the significant increase in executive compensation in profits. However, given the limitations of the existent data, this complication will be disregarded for the rest of the study.

31

Figure 3 visualizes this data series. From the figure, we can observe a slight increase in the profit share since the 1980s. It is important to note that if this data series included the treatment of executive payments, large part of which should be included in profits, the rise in the profit share from the 1980s would have been steeper.

Capacity utilization data is obtained from the Federal Reserve capacity utilization for manufacturing sector25. According to the explanation provided by the FED, the capacity utilization rate is equal to an output index divided by a capacity index. As previously given in the quote from Corrato and Mattey (1997), the FED’s capacity index attempts to capture the concept of sustainable maximum output a plant can maintain within the framework of a realistic work schedule. The trend of the capacity utilization series is given by figure 4. The series exhibit expected fluctuations in the short-run and averages to 80,16% over the given time period.

Figure 4: Capacity utilization, in % 100,00 90,00 80,00 70,00 60,00 50,00 40,00 30,00 20,00 10,00 0,00

1949q1 1951q1 1953q1 1955q1 1957q1 1959q1 1961q1 1963q1 1965q1 1967q1 1969q1 1971q1 1973q1 1975q1 1977q1 1979q1 1981q1 1983q1 1985q1 1987q1 1989q1 1991q1 1993q1 1995q1 1997q1 1999q1 2001q1 2003q1 2005q1 2007q1 2009q1 2011q1 2013q1 2015q1 Finally, the data for the employment rate is calculated by subtracting the seasonally adjusted unemployment rate obtained from the Bureau of Labour Statistics (BLS) from 1. So far, all the time series used in the quarterly estimations are obtained for the manufacturing sector. However, since our focus is to analyze the impact of the size of the reserve army of labour, the relevant measure for the employment rate is to look at the average economy-wise employment rate. As we previously stated, the effect of employment rate on the accumulation rate is likely to be non-linear. To account for this non-linearity, in the empirical estimation, as in Skott and Zipperer (2012), the employment rate is transformed using the following

25 Board of Governors of the Federal Reserve System (US), Capacity Utilization: Manufacturing [CAPUTLB00004SQ], retrieved from FRED, Federal Reserve Bank of St. Louis.

32 formulation: E=(1-e)-0.5. Over the given time period, the series, which is shown by figure 5, averages to 94,14% and rarely escapes the 92-96% range.

Figure 5: Employment rate, in % 100 98 96 94 92 90 88 86 84

1949q1 1951q1 1953q1 1955q1 1957q1 1959q1 1961q1 1963q1 1965q1 1967q1 1969q1 1971q1 1973q1 1975q1 1977q1 1979q1 1981q1 1983q1 1985q1 1987q1 1989q1 1991q1 1993q1 1995q1 1997q1 1999q1 2001q1 2003q1 2005q1 2007q1 2009q1 2011q1 2013q1 2015q1

6.3 Estimation Methodology

Empirical studies in the wage-led growth literature, most of which are summarized in subsection 6.1, typically apply one of the three following methodologies. If all the variables used in the estimation are I(0), i.e. stationary, a standard regression model using Ordinary Least Squares (OLS) techniques is estimated. In the case where all variables are I(1), that is non-stationary and integrated of order one, researches either try to estimate an ECM if there is an evidence of co-integration or difference each series appropriately and estimate an ordinary OLS regression. Finally, in a more complicated situation where some of the variables are I(0) whereas some are I(1), researchers apply the ARDL- based bounds testing approach to extract the potential short-term and long-term relationships.

In the empirical estimations of this study, we will adopt the ARDL-based bounds testing approach proposed and developed by Pesaran and Shin (1995, 1997) and Pesaran et al. (2001). As will be demonstrated later on in this section, one of the time series used in our estimations exhibits stationary pattern, while the other three exhibit non-stationary characteristic. Given the mixed nature of our underlying data, the use of the ARDL framework suits to our purposes since this estimation methodology does not require a specific identification of the order of the underlying data, that is, the ARDL technique allows a mixture of I(0) and I(1) variables.

One of the desirable properties of ARDL models is that in these models, both dependent and independent variables can be introduced in the model with lags. Hence, the

33 past values of variables are allowed to determine its present value. This constitutes a very desirable feature of ARDL models because the influence of the independent variables on the dependent variable might not be instantaneous and this technique takes these possible delays into consideration. Another advantage of being able to introduce lagged values is that with the appropriate modification of the number of lags, ARDL models correct for the problem of endogenous regressors (Pesaran and Shin, 1997, p.19). In other words, while more traditional co-integration methods may suffer from endogeneity problems (such as, Engle and Granger 1987 and Johansen and Juselius 1990), an ARDL model can successfully distinguish between dependent and independent variables. Thus, the ARDL estimations would be unbiased and efficient as they avoid the problems that may arise in the presence of serial correlation and endogeneity. The following quote from Stockhammer (2004, p.731) thoroughly summarizes these advantages:

“To ensure that the results are not spurious, i.e. caused by spurious correlations between unit root variables, an autoregressive distributed lag model (ADL) is also estimated. ADL models have been shown to have desirable properties even in the face of unit roots (Sims et al., 199 )…All explanatory variables are lagged. In the case of accumulation, this is also sensible because of the time lag between investment decision and investment expenditure. Furthermore, it prevents problems of simultaneity and inverse causation.”

A potential criticism against estimating an investment function in the ARDL form relates to the difficulties this technique creates in cross-country comparisons insofar as different lag structures used for different countries potentially make regression results sensitive to changes in the lag structure. However, as argued by Van Treeck (2007, p.10), we also argue that this flexibility makes the ARDL approach particularly desirable, since it fits well into the epistemological principles advocated by many post-Keynesians.

The estimation is carried out for the US economy using quarterly data spanning the period between 1949; Q1 and 2015; Q4. As the first step of our estimation, time series are tested for unit roots by applying Augmented Dickey Fuller (ADF) tests. The ADF tests were specified to contain intercepts in the test equations based on the behaviour of the time series under question. Estimation of an ARDL model requires none of the series to be integrated of order two. To check for this requirement, ADF tests are also applied to the first differences of all variables.

34

Following Pesaran et al (2001), the theoretical function given by equation (5.4) can be assembled in an ARDL model in the following form:

where,

is the first difference operator, p is the optimal lag length, is the changes in the capacity index (investment), e is employment, u is capacity utilization, h is profit share and ϵ is the white-noise disturbance term. In the empirical estimations, the optimal lag length is established by using Akaike’s information criteria (AIC).

The first crucial step in the ARDL estimation is to apply the Pesaran, Shin and Smith (2001) bounds test to test for the existence of a long-run relationship between the dependent and the independent variables. The test is carried out by imposing restrictions on the estimated long-run coefficients of the investment rate. The null and alternative hypothesis of the test is given as follows:

(no long-run relationship exists)

The computed F-statistic value is evaluated according to the critical values tabulated in Pesaran et al. (2001).These tables provide lower and upper bounds on the critical values. The lower bound critical values assume that the explanatory variables are integrated of order zero, while the upper bounds values assume that they are integrated of order one. If the computed F-statistic is smaller than the lower bound value, the null hypothesis is not rejected and we can conclude that there is no long-run relationship between the rate of accumulation and its determinants. Conversely, if the computed F-statistic is greater than the upper bound value, the null hypothesis can be rejected and we can conclude that a long-run relationship exists. If the computed F-statistics fall between the two bound values, the test result is inconclusive.

If the bounds tests leads to the result that there is a co-integration relationship, then we can estimate long-run relationship between our variables, which can be represented as:

ϵ ; As well as the Error Correction Model:

where,

35

After making sure of the existence of the long-run relationship, the long-run coefficients can be estimated from equation (6.3.1). Noting that at long run equilibrium,

, the long-run coefficients for are given by

, and respectively.

In the last step of the ARDL estimation, we check the robustness of our model using several diagnostic test statistics. First of all, since we have a model with autoregressive structure, we have to make sure dynamic stability of the model. For this purpose, the cumulative sum of recursive residuals (CUSUM) and the CUSUM of square (CUSUMSQ) are applied to the residuals of the ECM to test parameter constancy. Later on, Durbin-Watson tests for first-order autocorrelation, White tests for heteroscedasticity, Jacque-Bera normality tests and Ramsey RESET specification tests are applied.

6.4 Estimation results

The results of the ADF test are reported in table 2. Out of four variables, only is found to be non-stationary, integrated of order one. All explanatory variables are found to be stationary. Also, a visual inspection of profit share, capacity utilization and employment rate series from figures 3, 4 and 5 imply that these series have finite variances that do not depend on time.

Table 2: Tests for unit roots on the variables of the investment function for the US Null hypothesis: The variable has a unit root. Variable Test statistic Lag Test Variable Test Lag length Specification statistic length

-2.146 4 Intercept -6.466* 4 [0.2263] [0.0000] h -2.872 *** 4 Intercept h -7.916* 4 [0.0486] [0.0000] e -3.659* 2 Intercept e -6.784* 4 [0.0047] [0.0000] u -4.360* 3 Intercept u -8.780* 4 [0.0003] [0.0000] Note: *, **, *** denotes 1%, 5% and 10%significance levels respectively. P-values are in the brackets

The results of the bounds test are given in table 3. The computed F-statistic, which is greater than the upper bound value at the 5% critical level, confirms the existence of a long-term relationship between the dependent and independent variables.

36

Table 3: Pesaran/Shin/Smith (2001) Bounds Test for Cointegration Analysis H0: no levels relationship

F -statistic= 3.730575 Critical value Lower Bound Value Upper Bound Value 1% 3.65 4.66 5% 2.79 3.67 10% 2.37 3.2

Since the bounds test result yields an evidence of co-integration, now both the long- run model and the ECM can be estimated. The most important term in the ECM estimation is the sign and the coefficient of the error correction term (ECT). Since this term is negative and statistically significant at the 1% level, this confirms the existence of long-term relationship between the dependent and the independent variables. However, the small coefficient indicates a slow adjustment, which means about 2% of the disequilibria of the previous quarter adjusts back to long-run equilibrium in the current quarter. The ECM also provides short-run relationship through the lagged differences of the explanatory variables. The results indicate that the employment rate and the profit share do not have statistically significant impact on the rate of accumulation in the short-run. Only the rate of capacity utilization has a significant short-term impact however with a small positive coefficient.

Table 4: ECM based on equation 6.2.3 Dependent variable: change in Where Variable Coefficient t-value p-value 1.397678* 23.236164 0.0000 -1.054952* -10.383565 0.0000 0.599305* 5.258719 0.0000 -0.439686* -4.445639 0.0000 0.133941* 2.358174 0.0191 -0.009727 -0.353553 0.7240 0.007465* 2.910746 0.0039 -0.003024 -1.310488 0.1912 -0.001664 -0.788810 0.4310 0.004340** 2.281699 0.0234 0.007464 1.634044 0.1035 -0.018818* -4.275502 0.0000 #of observations 264 Sample 1949Q1-2015Q4

The long-run effects of independent variables on accumulation are reported in table 5. Even though all coefficients obtained the expected signs, only the capacity utilization is found to be significant at the 1% significance level. Accordingly, the reaction of the accumulation

37 rate to a one percentage point change in the rate of utilization is equal to 0.18 percentage points per quarter, hence 0.72 percentage points per year. In line with the findings of the literature, the profit share did not turn out to be significant. Similarly, the employment rate is also found to be insignificant. Table 5: Long-run coefficients Variable Coefficient t-statistic p-value e -0.969391 -1.552071 0.1219 u 0.180931* 2.605490 0.0097 h 0.126326 1.304252 0.1934 constant -13.319632** -2.473819 0.0140

Table 6 provides the results of the ARDL estimation based on equation (6.3.2), which can be simplified to equation (6.4.1) with the number of lags determined by the AIC criterion.

6.4.1

ϵ

Table 6: ARDL (6,0,0,4) estimation based on equation 6.2.226 Dependent variable: (the growth of manufacturing capacity index) Variable Coefficient t-value p-value 2.376472* 38.60579 0.0000 -2.449445* -15.71740 0.0000 1.654699* 7.981947 0.0000 -1.041747* -5.080958 0.0000 0.573084* 3.794274 0.0002 -0.132424** -2.258352 0.0248 -0.018768* -2.683121 0.0078 0.009109* 4.667124 0.0000 -0.009032* -2.633777 0.0090 0.001806 0.491707 0.6234 0.005580 1.629326 0.1045 -0.003961** -2.041952 0.0422 0.002446*** 1.888813 0.0601 constant -0.257879* -3.503129 0.0005 #of observations 262 Sample 1950Q3-2015Q4 R2 0.994382 R2-adj 0.994087 F-statistic 3376.530

A striking implication of this estimation is that the coefficients of the lagged values of the dependent variable seem to add up to 1, which implies that the estimation is very likely to

26 To check the robustness of the estimation, ARDL model with trend was also estimated. However, as the coefficient of the trend term was insignificant, the estimation is carried out without a trend term.

38 correspond to a Harrodian type investment function as approximated by one static and one dynamic equation in section 4. In order to test whether the sum of the coefficients is statistically equal to 1, the Wald test is applied. The test is carried out by imposing restrictions on the coefficients of the lagged values of the dependent variable given in equation (6.4.1). The results are reported in table 7. With the obtained F-statistic, we fail to reject the null hypothesis at the 10% significance level, which means that the sum of the coefficients of the lagged values of is statistically equal to 1. This finding suggests that at the very least, the Harrodian type investment function hypothesis cannot be rejected using the standard 10% criterion. Before discussing the implications of these estimations in the next sub-section, we will check the robustness of our estimation using several standard diagnostics tests. Table 7: Wald Test Null hypothesis Test statistic F-statistic(1,248)= 3.764488

Prob=0.0535

We show the results of the CUSUM and CUSUMSQ tests in figure 6. The dotted lines represent the critical upper and lower bounds at the 5% level of significance. If the plot of CUSUM and CUSUMSQ lies within the 5% critical bounds, then the null hypothesis that all coefficients are stable cannot be rejected. A visual inspection of the figures reveals that the parameters of the model do not suffer from structural instability. Figure 6: CUSUM and CUSUMSQ

Table 8 provides the results of other diagnostic tests. Accordingly, there is no evidence of serial correlation, heteroscedasticity or model misspecification. The model fails to pass the Jarque-Bera normality test; however, since the sample size is large enough, according to the

39 common statistical conventions, this does not seem to pose a problem with respect to robustness of the estimated coefficients. Table 8: Diagnostic tests Diagnostic Test Null hypothesis Test statistic Breusch-Godfrey No serial correlation F-stat=0,439017 Prob. F (2,246)=0,6452 White test Constant variance F-stat=1,432861 Prob. F (11,252)= 0,0207 Jarque-Bera Normality Test Normal distribution 253.5290 Prob=0,000000 Ramsey RESET Model has no omitted variables F-stat (1,251)=0,329573 Prob=0,5664

6.5 The interpretation of the results and directions for future research

Overall, the obtained results fail to statistically confirm the proposed negative and non-linear relationship between the employment rate and the rate of accumulation in the context of a Bhaduri-Marglin type investment function. Although the coefficient of the employment rate has the expected sign, its statistical significance does not allow us to derive decisive conclusions in relation to the existence of labour constraints affecting accumulation decisions in the US economy.

With regard to the comparison of our results with similar estimations in the literature, a few comments can be made. As stated earlier, to our best knowledge, none of the studies summarized in our empirical survey estimates a Bhaduri-Marglin type investment function that has the employment rate as one of the explanatory variables, except for Skott and Zipperer (2012). Even though this study and the one by Skott and Zipperer (2012) utilize the same data series, there are some differences between the results produced by these two different estimations. First of all, unlike our results, the profit share and the employment rate are found to be significant long-run explanatory variables in the quarterly estimation of Skott and Zipperer (2012). As for the capacity utilization, both studies find similar results with respect to its long-run significance, with a slight difference in terms of the size of the obtained coefficients, which is found to be lower by Skott and Zipperer (2012). There might be few factors that could explain this divergence. First of all, as mentioned earlier, Skott and Zipperer (2012), in order to focus on the deviations of the data series from their long-term trends, smooth the series by HP-filter and then apply standard OLS estimation. As the ARDL approach is capable of distinguishing between long-term and short-term influences of the explanatory variables, application of HP-filter was not required for our estimation. Different approaches to extract long-term relationships stand out as a potential factor that could explain

40 the divergent results obtained from these studies. Secondly, the choice of lag lengths used in the empirical estimations might have affected the size and the significance of the coefficients as to create some differences. It is a conventional practice in empirical estimations to add the lagged values of dependent variables to overcome serial-correlation problems; however, most of the time this practice influences the significance of the coefficients. With regard to the comparison of the significance of the acceleration and the profitability effects, our results seem to be in line with the general findings of the literature summarised in section 6.1, as the capacity utilization is highly significant in the long-run; whereas the profit share is found to be insignificant. In addition to this, high long-run sensitivity of investment to changes in the capacity utilization verifies the Harrodian argument on this subject, as we have discussed in section 4.

Even though the effect of employment rate on accumulation was not found to be as expected, our results still put forward some interesting implications that relate to the Harrodian critics on the Kaleckian models, which are worthwhile to briefly discuss in this section. First of all, the high long-run sensitivity of accumulation to changes in the capacity utilization, which is given by the coefficient .1 , exceeds any plausible value of the sensitivity of the long-run saving-capital ratio27. In this sense, our estimation provides empirical support to the Harrodian arguments, which question the extension of the Keynesian stability condition into a long-run analysis, as summarized in section 4. Secondly, the ARDL estimation and the Wald test applied on it seem to support a Harrodian type of investment function, in which the change in the accumulation rate, rather than the accumulation rate itself, is explained by the capacity utilization, profit share and the employment rate. When the sum of the coefficients of the lagged values of is statistically equal to 1, as it is verified with the Wald Test provided in table 7, table 6 implies that the change in the rate of accumulation can be explained by statistically significant explanatory variables of the rate of capacity utilization, profit share and the employment rate. Even though a separate estimation of a Harrodian long-run investment function specification might have been required to drive decisive conclusions, the existing evidence as such indicates the plausibility of such a specification in addition to its failure to support the Kaleckian position on extending the Keynesian stability condition to the long-run. In this sense, a more careful empirical

27 The stability condition is initially given as: . From the saving function, can be substituted by (S/K)/u. By arranging the terms and using output/capital ratio as a proxy for capacity utilization, the stability condition can alternatively be given by: . Following Skott (2008b), the capital-output ratio is considered to be falling in the range of 1-3. Given this, seems to exceed any plausible value of the saving rate for the US economy.

41 investigation of a Harrodian alternative framework stands out as an important task to provide robust empirical evidences to this ongoing discussion.

Overall, failing to empirically confirm our proposed investment function does not necessarily eliminate the plausibility of the earlier claim that many of the studies in the empirical wage-led growth literature are likely to be biased insofar as they exclude the potential effects of employment rate on accumulation decisions in mature economies. The predominant emphasis on dual economies in the Kaleckian framework may jeopardize the relevance of their analysis with respect to many mature economies. This study reveals the need for the generation of more knowledge to understand the nature of the investment function that reflects better the structural features of mature economies. In this respect, a few directions can be given for future research. A panel data approach that would incorporate useful information from other mature economies, such as Japan, the Netherlands or Germany, could have potentially provided more precise estimations. However, there are significant data issues, which make this task notoriously difficult. For this reason, if some of the data issues can be overcome; individual estimations of a similar type for other mature economies are also likely to be valuable contributions to this discussion. Moreover, even though the ARDL-based approach seems to be appropriate for an individual estimation, the different results obtained from this study and the one by Skott and Zipperer (2012) suggest that it is worthwhile to check the robustness of our estimation by applying some other estimation techniques. In this sense, Vector Auto-regression (VAR) or Vector Error Correction Model (VECM) estimations can be considered as alternative methods. The order of integration of our underlying data did not allow this study to benefit from these techniques; however, in the existence of alternative data, these methods can potentially be utilized for future research.

7. Conclusion

In this study, following Skott (2015), it has been argued that the standard Kaleckian models of growth and distribution suffer from the lack of consideration of the labour markets, inclusion of which would have important implications on the conclusions of the wage-led growth literature that have been derived by considering only the goods market in isolation. More specifically, it has been argued that in mature economies, the accumulation rate depends inversely on the employment rate insofar as (1) a state of near full employment potentially affects firms’ views on their prospects to obtain the workers they would need to increase future output and for this reason put a downward adjustment in the expected growth rate of output, which would reduce the need for additions to the capital stock and (2) a sustained

42 increase in employment strengths workers vis-à-vis the management and animal spirits suffers as a result along with the traditional Marxian and Kaleckian insights. In order to incorporate the stated hypothesis into a benchmark Kaleckian model, the negative effects of the employment rate are added into the standard Bhaduri-Marglin investment function. This alternative investment function, which is believed to better reflect the structural features of mature economies, is estimated for the US economy through the application of the ARDL- based bounds testing approach.

The survey of the empirical literature has revealed some of the weaknesses that are commonly present in most of the empirical studies in the empirical wage-led growth literature, such as the use of growth rate of GDP as a proxy for the capacity utilization. A critical examination of the existing empirical studies informed this study in terms of choosing the appropriate empirical counterparts of the variables used in theoretical models. Accordingly, quarterly profit share, capacity utilization and the employment rate data series are regressed on the growth rate of manufacturing capacity index, which is used to approximate for the rate of accumulation.

The empirical estimation failed to statistically confirm the suggested long-term negative and non-linear relationship between the employment rate and the rate of accumulation. Among all explanatory variables, only the capacity utilization turned out to be statistically significant both in the short and the long-run, with a very high coefficient especially in the long-run. The high long-term significance of the capacity utilization and the insignificance of the profit share seem to be in line with the general findings of other empirical studies in the literature.

The empirical estimation also provided some interesting implications that relate to the Harrodian critiques on the Kaleckian models. First of all, the estimated high long-run sensitivity of the rate of accumulation to changes in the capacity utilization suggests that the Keynesian stability condition is not satisfied in the long-run as the value exceeds any plausible value of the sensitivity of the long-run saving rate. Secondly, our ARDL estimation suggests the plausibility of a Harrodian type investment function, in which the change in the rate of accumulation is explained by the capacity utilization, profit share and the employment rate. Even though further exploration of empirical validity of an alternative Harrodian framework might have been required to derive decisive conclusions, the existing evidence as such fails to support the Kaleckian position on extending the Keynesian stability condition to long-run analyses.

43

Overall, it can be concluded that more knowledge is to be generated about the accumulation dynamics in mature economies in order to understand the nature of investment function that reflects better the structural features of these economies, which are likely to be exposed to effective labour supply constraints. In this respect, without disregarding the well- recognized data problems, this paper suggests for future research checking the empirical validity of the labour constrained Bhaduri-Marglin investment function through estimating individual aggregate investment functions for other mature economies and/or applying panel data estimation.

If future research confirms our main hypothesis, this would provide an important empirical support to the argument that “the wage- vs. profit-led distinction is not as simple as it appears in the simple post-Kaleckian models” In this sense, incorporation of the employment rate in the investment function is very likely to address at least one of the drawbacks of the Kaleckian models and the following wage-led growth literature, which were attempted to be explained throughout this thesis.

Word Count: 14784 (without footnotes included, including in-text references, headings, tables and figures) 16176 (footnotes, in-text references, headings, tables and figures included)

44

I.Definitions of the Variables and Parameters Used in the Model

Variable Mathematical Theoretical definition definition r Profit rate h Π Profit share

Π Total nominal profits Y Output Potential output p K Capital stock v Capital coefficient

u Capacity utilization

W Nominal wage bill w Nominal wage rate

a Labour coefficient

m Mark-up Π Propensity to save out of profits g The rate of accumulation I Real investment Animal spirits Sensitivity of investment w.r.t. the rate of capacity utilisation Sensitivity of investment w.r.t. the rate of profit share The rate of depreciation u* Equilibrium level of capacity utilization g* Equilibrium level of rate of accumulation r* Equilibrium level of profit rate e Employment rate

L Number of employed people N Total labour force k Capital stock to labour force

ratio Sensitivity of investment w.r.t. the rate of employment n Natural rate of growth

45

II.Definitions of Time Series used in the Empirical Estimation

Variable Name Definition Type Unit of Measurement Investment The growth rate of Fed manufacturing capacity Dependent Percentage index variable

h Profit share Independent Percentage

variable

u Capacity Independent Percentage

utilization variable

e Employment 100-seasonally adjusted unemployment rate Independent rate Transformed as (1-e)-0.5 variable

III.List of Abbreviations

ARDL (ADL) Autoregressive Distributed Lag ECM Error Correction Model ECT Error Correction Term VAR Vector Auto Regressive VECM Vector Error Correction Model CUSUM Cumulative Sum CUSUMSQ Cumulative Sum Squares OLS Ordinary Least Squares AR Auto Regressive ARIMA Auto Regressive Integrated Moving Average HP Hodrick Prescott AIC Akaike Information Criterion NIPA National Income and Product Accounts BEA Bureau of Economic Analysis OECD Organization of Economic Cooperation and Development GDP

IV.List of Figures

Figure 1: The ratio of investment to profits ...... 26

Figure 2: Investment, the growth rate of FED’s manufacturing index: in % ...... 30

Figure 3: Profit share, in % ...... 31

Figure 4: Capacity utilization, in % ...... 32

Figure 5: Employment rate, in % ...... 33

Figure 6: CUSUM and CUSUMSQ ...... 39

46

V.List of Tables

Table 1: The Overview of Empirical Studies on Investment Function Estimations ...... 27

Table 2: Tests for unit roots on the variables of the investment function for the US ...... 36

Table 3: Pesaran/Shin/Smith (2001) Bounds Test for Cointegration Analysis ...... 37

Table 4: ECM based on equation 6.2.3 ...... 37

Table 5: Long-run coefficients ...... 38

Table 6: ARDL (6,0,0,4) estimation based on equation 6.2.2 ...... 38

Table 7: Wald Test ...... 39

Table 8: Diagnostic Tests ...... 40

47

VI.List of References

Allain, O. (2015a). Demographic Growth, Harrodian (In)Stability and the Supermultiplier. Allain, O. (2015b). Tackling the instability of growth: a Kaleckian-Harrodian model with an autonomous expenditure component. Cambridge Journal of Economics, 39(5), 1351- 1371. Amadeo, E. J. (1986). Notes on capacity utilisation, distribution and accumulation. Contributions to , 5(2), 83-94. Auerbach, P., & Skott, P. (1988). Concentration, competition and distribution. International Review of , 2(1), 42-61. Baran, P. A., & Sweezy, P. M. (1966). Monopoly Capital: An Essay on the American Economic and Social Order. Barbosa-Filho, N., & Taylor, L. (2006). Distributive and demand cycles in the US economy- a structuralist Goodwin model. Metroeconomica, 57, 389-411. Bhaduri, A., & Marglin, S. (1990). Unemployment and the real wage: the economic basis for contesting political ideologies. Cambridge Journal of Economics, 14, 375-393. Bhaskar, V., & Glyn, A. (1995). Investment and profitability: the evidence from the advanced countries. In G. Epstein, & H. Gintis (Eds.), Macroeconomic Policy after the Conservative Era. Studies in Investment, Saving and Finance. Cambridge: Cambridge University Press. Blecker, R. (2011). Open economy models of distribution and growth. In E. Hein, & E. Stockhammer (Eds.), A Modern Guide to Keynesian and Economic Policies (pp. 215-239). Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Blecker, R. A. (1989). International competition, income distribution and economic growth. Cambridge Journal of Economics, 13, 395-412. Blecker, R. A. (2015). Wage-led versus profit-led demand regimes: The long and the short of it. Eastern Economic Association. Bowles, S., & Boyer, R. (1995). Wages, aggregate demand, and employment in an open economy: an empirical investigation. In G. Epstein, & H. Gintis (Eds.), Macroeconomic Policy after the Conservative Era. Studies in Investment, Saving and Finance. Cambridge: Cambridge University Press. Caldentey, E. P., & Vernengo, M. (2013, September). Wage and profit-led growth: The limits to Neo-Kaleckian models and a Kaldorian Proposal. Levy Economics Institute, Working Paper(775). Capacity Utilization: Manufacturing [CAPUTLB00004SQ]. (2016, April 14). Retrieved from FRED, Federal Reserve Bank of St. Louis: https://research.stlouisfed.org/fred2/series/CAPUTLB00004SQ Carvalho, L., & Rezai, A. (2014). Personal income inequality and aggregate demand. FEA- USP Working Paper.

48

Chirinko, R. (1993). Business fixed investment spending: modeling strategies, empirical results and policy implications. Journal of Economic Literature, 31, 1875-1911. Committeri, M. (1986). Some comments on recent contributions on capital accumulation, income distribution and capacity utilization. Political Economy, 2, 161-186. Corrado, C., & Mattey, J. (1997). Capacity utilization. Journal of Economic Perspectives, 11(1). Databases, Tables & Calculators by Subject. (2016, April 14). Retrieved from Bureau of Labour Statistics : http://data.bls.gov/timeseries/LNS14000000 Duménil, G., & Lévy, D. (1995). A post-Keynesian long-term equilibrium with equalized profit rates? A rejoinder to Amitava Dutt's synthesis. Review of Radical Political Economics, 27(2), 135-141. Dutt, A. K. (1984). Stagnation, income distribution and monopoly power. Cambridge Journal of Economics, 8(1), 25-40. Dutt, A. K. (1990). Growth, distribution and uneven development. Cambridge: Cambridge University Press . Dutt, A. K. (2009). Path dependence, equilibrium and economic growth. In P. Arestis, & M. Sawyer (Eds.), Path Dependency and Macroeconomics (pp. 119-161). Palgrave Macmillan UK. Dutt, A. K. (2012). Distributional dynamics in Post Keynesian growth models. Journal of Post , 34(3), 431-451. Eckaus, R. S. (1953). The Acceleration Principle Reconsidered. The Quarterly Journal of Economics, 67(2), 209-230. Engle, R., & Granger, C. (1987). Cointegraation and error correction: representation, estimation and testing. Econometrica, 55(2), 251-276. Flaschel, P., & Skott, P. (2006). Steindlian Models of Growth and Stagnation. Metroeconomica, 57(3), 303-338. Flaschel, P., & Skott, P. (2006). Steindlian Models of Growth and Stagnation. Metroeconomica, 57(3), 303-338. Goodwin, R. (1967). A growth cycle. In C. H. Feinstein (Ed.), Socialism, Capitalism and Economic Growth . Cambridge: UK: Cambridge University Press . Harrod, R. F. (1939). An essay in dynamic theory. The Economic Journal, 49(193), 14-33. Hein, E. (2007). Interest rate, debt, distribution and capital accumulation in a post-Kaleckian model. Metroeconomica, 58(2), 310-339. Hein, E. (2014). Distribution and Growth after Keynes: a Post-Keynesian Guide. Edward Elgar Publishing.

49

Hein, E., & Ochsen, C. (2003). Regimes of interest rates, income shares, savings, and investment: A Kaleckian model and empirical estimations for some advanced OECD- economies. Metroeconomica, 54(4), 404-433. Hein, E., & Schoder, C. (2011). Interest rates, distribution and capital accumulation- A post- Kaleckian perspective on the US and Germany. International Review of Applied Economics, 25(6), 693-723. Hein, E., & Tarassow, A. (2009). Distribution, aggregate demand and productivity growth: theory and empirical results for six OECD countries based on a post-Kaleckian model. Cambridge Journal of Economics, 34(4), 727-754. Hein, E., & Tarassow, A. (2010). Distribution, aggregate demand and productivity growth- theory and empirical results for six OECD countries based on a post-Kaleckian model. Cambridge Journal of Economics, 34, 727-754. Hein, E., & Vogel, L. (2007). Distribution and growth reconsidered- empirical results for Austria, France, Germany, the Netherlands, the UK and the USA. IMK Working Paper(3). Hein, E., & Vogel, L. (2009). Distribution and growth in France and Germany- Single equation estimations and model simulations based on the Bhaduri/Marglin-model. Review of Political Economy, 21(2), 245-271. Hein, E., Lavoie, M., & Treeck, T. v. (2011). Some instability puzzles in Kaleckian models of growth and distribution: a critical survey. Cambridge Journal of Economics, 35(3), 587-612. Hein, E., Lavoie, M., & Treeck, T. v. (2012). Harrodian Instability and the 'Normal Rate' of Capacity Utilization in Kaleckian Models of Distribution and Growth- a Survey. Metroeconomica, 63(1), 139-169. Hicks, J. R. (1950). A Contribution to the Theory of Trade Cycle. Industrial Capacity: Manufacturing (SIC) [CAPB00004S]. (2016, April 13). Retrieved from FRED, Federal Reserve Bank of St. Louis: : https://research stlouisfed org/fred2/series/CAPB00004S Johansen, S., & Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration- with Applications to the . Oxford Bulletin of Economics and Statistics, 52(2), 169-210. Kaldor, N. (1951). Mr. Hicks on the Trade Cycle. The Economic Journal, 61(244), 833-847. Kaldor, N. (1966). Marginal productivity and the macroeconomic theories of distribution. Review of Economic Studies, 33, 309-19. Kalecki, M. (1943). Political Aspects of Full Employment. The Political Quarterly, 14(4), 322-330. Kalecki, M. (1943). Studies in Economic Dynamics. London: George Allen and Unwin. Kalecki, M. (1954). Theory of Economic Dynamics. London: George Allen and Unwin.

50

Kalecki, M. (1971). Selected Essays on the Dynamics of the Capitalist Economy, 1933-1970. Cambridge, UK: Cambridge University Press. Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan. Kiefer, D., & Rada, C. (2015). Profit maximising goes global: the race to the bottom. Cambridge Journal of Economics, 39(5), 1333-1350. Kindleberger, C. P. (1967). Europe's postwar growth: The role of labour supply. Harvard University Press. Kurz, H. D. (1990). Technical change, growth and distribution: a steady-state approach to 'unsteady' growth. In H. D. Kurz, Capital, Distribution and (pp. Cambridge, UK). Lavoie, M. (1992). Foundations of Post-Keynesian Economic Analysis. Aldershot: Edward Elgar . Lavoie, M. (1995). Interest rates in post-Keynesian models of growth and distribution. Metroeconomica, 46(2), 146-177. Lavoie, M. (1996). Traverse, Hysteresis, and Normal Rates of Capacity Utilization in Kaleckian Models of Growth and Distribution. Review of Radical Political Economics, 28(4), 113-147. Lavoie, M. (2016). Convergence Towards the Normal Rate of Capacity Utilization in Neo- Kaleckian Models: The Role of Non-Capacity Creating Autonomous Expenditures. Metroeconomica, 67(1), 172-201. Lavoie, M., Rodriguez, G., & Seccareccia, M. (2004). Similitudes and Disrepancies in Post- Keynesian and Marxist Theories of Investment: A Theoretical and Empirical Investigation. International Review of Applied Economics, 18(2), 127-149. Lima, G. T., & Setterfield, M. (2008). Inflation targeting and macroeconomic stability in a Post Keynesian economy. Journal of Post Keynesian Economics, 30(3), 435-461. Naastepad, C. W. (2006). Technology, demand and distribution: a cumulative growth model with an application to the Dutch productivity slowdown. Cambridge Journal of Economics, 30(3), 403-434. Naastepad, C. W., & Storm, S. (2007). OECD demand regimes (1960-2000). Journal of Post Keynesian Economics, 29(2), 211-246. Naastepad, C. W., & Storm, S. (2010). Feasible egalitarianism: demand-led growth, labour and technology. In M. Setterfield, Handbook of Alternative Theories of Growth. Cheltehnam: Edward Elgar. Ndikumana, L. (1999). Debt service, financing constraints, and fixed investment: Evidence from panel data. Journal of Post Keynesian Economics, 21(3), 455-478. Nikiforos, M. (2014). Distribution-led Growth in the Long Run. Levy Economics Institute of Bard Collage, Working Paper(814).

51

Nikiforos, M., & Foley, D. (2012). Distribution and capacity utilization: conceptual issues and empirical evidence. Metroeconomica, 63(1), 200-229. Onaran, Ö., & Galanis, G. (2 12). Is aggregate demand wage-led or profit-led? National and global effects. Conditions of Work and Employment Series(40). Onaran, Ö., Stockhammer, E., & Grafl, L. (2 11). Financialisation, incomes distribution and aggregate demand in the USA. Cambridge Journal of Economics, 35(4), 637-661. Palley, T. I. (1996). Growth theory in a Keynesian mode: some Keynesian foundations for new endogeneous growth theory. Journal of Post Keynesian Economics, 19(1), 113- 135. Palley, T. I. (2010). Aggregate Demand, Aggregate Supply and Endogeneous Growth: A Synthetic neo-Kaleckian Model. IMK Working Paper(7). Palley, T. I. (2013). Enriching the neo-Kaleckian growth model: nonlinearities, political economy and financial factors. Political Economy Research Institute Working Paper Series(335). Palley, T. I. (2014). Rethinking wage vs. profit-led growth theory with implications for policy analysis. IMK Working Paper(141). Pesaran, M. H., & Shin, Y. (1997). An autoregressive distributed-lag modelling approach to cointegration analysis. a paper presented at the Symposium at the Centennial of , The Norwegian Academy of Science and Letters, 31. Pesaran, M. H., & Smith, R. (1995). Estimating long-run relationships from dynamic heteregeneous panels. Journal of , 68(1), 79-113. Peseran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds Testing Approaches to the Analysis of Level Relationship. Journal of Applied Econometrics, 16(3), 289-326. Robinson, J. (1962). Essays in the Theory of Economic Growth. London and Basingstoke: Macmillan. Rowthorn, R. E. (1977). Conflict, inflation and money. Cambridge Journal of Economics, 1(3), 215-239. Sánchez, G. V., & Luna, A. (2 14). Slow growth in the Mexican economy. Journal of Post Keynesian Economics, 37(1), 115-133. Schoder, C. (2011). Kaleckian vs. Marxian specifications of the investment function: Some empirical evidence for the US. University Library of Munich, Germany. Skott, P. (2008a). Growth, instability and cycles: Harrodian and Kaleckian models of accumulation and income distribution. Department of Economics Working Paper(12). Skott, P. (2008b). Theoretical and empirical shortcomings of the Kaleckian investment function. Economics Department Working Paper Series(13). Skott, P. (2012). Theoretical and empirical shortcomings of the Kaleckian investment function. Metroeconomica, 63, 109-138.

52

Skott, P. (2015). Notes on wage-led versus profit-led growth. Paper prepated for the Workshop on Analytical Political Economy. Sendai-Japan. Skott, P. (2016). Autonomous demand and the Harrodian criticisms of the Kaleckian model. Skott, P., & Ryoo, S. (2008). Financialization in Kaleckian economics with and without labor constraints. Europen Jounal of Economics and Economic Policies, 5, 357-386. Skott, P., & Ryoo, S. (2008). Macroeconomic implications of financialization. Cambridge Jounal of Economics, 32, 827-862. Skott, P., & Zipperer, B. (2012). An empirical evaluation of three post-Keynesian models. Europen Journal of Economics and Economic Policies, 9(2), 277-308. Steindl, J. (1952). Maturity and Stagnation in American Capitalism (2nd ed.). Oxford: Blackwell. Stockhammer, E. (2004). Financialisation and the slowdown of accumulation. Cambridge Journal of Economics, 28(5), 719-741. Stockhammer, E. (2008). Some stylized facts on the finance-dominated accumulation regime. Competition and Change, 12(2), 189-207. Stockhammer, E. (2009). Determinants of functional income distribution in OECD countries. IMK Study(5). Stockhammer, E., & Ederer, S. (2008). Demand effects of the falling wage share in Austria. Empirica, 35(5), 481-502. Stockhammer, E., & Onaran, Ö. (2 4). Accumulation, distribution and employment: a structural VAR approach to a Kaleckian macro model. Structural Change and Economic Dynamics, 15(4), 421-447. Stockhammer, E., & Stehrer, R. (2011). Goodwin or Kalecki in demand? Functional income distribution and aggregate demand in the short run. Review of Radical Political Economics Working Paper Series(203). Stockhammer, E., Hein, E., & Grafl, L. (2011). Globalization and the effects of changes in functional income distribution on aggregate demand in Germany. International Review of Applied Economics, 25(1), 1-23. Stockhammer, E., Onaran, Ö., & Ederer, S. (2 9). Functional income distribution and aggregate demand in the Euro area. Cambridge Journal of Economics, 33(1), 139-159. Taylor, L. (1983). Structuralist macroeconomics: Applicable models for the thirld world. New York: Basic Books. Taylor, L. (1990). Socially relevant policy analysis: Structuralist computable general equilibrium models for the developing world. MIT Press. Taylor, L. (1991). Income Distribution, Inflation and Growth. Lectures on Structuralist Macroeconomic Theory. MIT Press.

53

Taylor, L. (2004). Reconstructing Macroeconomics: Structuralist Proposals and Critiques of the Mainstream. Cambridge, MA: Harvard University Press. Toniolo, G. (1998). Europe's golden age, 1950-1973: speculations from a long-run perspective. Review, 252-267. Treeck, T. V. (2007). Reconsidering the Investment-Profit Nexus in Finance-Led Economies: an ARDL-Based Approach. IMK Working Paper. U.S. Department of Commerce, Bureau of Economic Analysis. (2016, April 13). Retrieved from National Income and Product Accounts Tables: http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=1&isuri=1 Zipperer, B., & Skott, P. (2010). Cyclical Patterns of Employment, Utilization and Profitability. Economics Department Working Paper Series(96).

54

VII. Appendix

Flow chart 1: The Benchmark Kaleckian Model

Flow chart 2: Labour Constrained Kaleckian Model

55

Die Eidesstattliche Erklärung ist Teil der Abschlussarbeit und wird in die Arbeit eingebunden. Sie hat folgenden Wortlaut:

Eidesstattliche Erklärung

„Hiermit erkläre ich an Eides Statt, dass ich die vorliegende Master’s Thesis selbständig und ohne fremde Hilfe verfasst und andere als die angegebenen Quellen und Hilfsmittel nicht benutzt habe. Die den benutzten Quellen wörtlich oder inhaltlich entnommenen Stellen (direkte oder indirekte Zitate) habe ich unter Benennung des Autors/der Autorin und der Fundstelle als solche kenntlich gemacht.

Mir ist bekannt, dass die wörtliche oder nahezu wörtliche Wiedergabe von fremden Texten oder Textpassagen aus Büchern, Zeitschriften, Zeitungen, aus dem Internet u.ä. ohne Quellenangabe als Täuschungsversuch gewertet wird und zu einer Beurteilung der Arbeit mit „nicht ausreichend“ bzw. „ohne Erfolg“ führt.

Sollte ich die Arbeit anderweitig zu Prüfungszwecken eingereicht haben, sei es vollständig oder in Teilen, habe ich die Prüfer/innen und den Prüfungsausschuss hierüber informiert."“

Esra nur ugurlu 14.06.2016 Northampton Berlin, Datum Unterschrift

The following statutory declaration is a part of the thesis, and should be included in the bound work.

Statutory Declaration

I hereby formally declare that I have written the submitted dissertation entirely by myself without anyone else’s assistance. Where ever I have drawn on literature or other sources, either in direct quotes, or in paraphrasing such material, I have given the reference to the original author or authors and to the source where it appeared.

I am aware that the use of quotations, or of close paraphrasing, from books, magazines, newspapers, the internet or other sources, which are not marked as such, will be considered as an attempt at deception, and that the thesis will be graded with a fail.

I have informed the examiners and the board of examiners in the case that I have submitted the dissertation, entirely or partly, for other purposes of examination.

14.06.2016 Northampton Esra nur ugurlu

Berlin, date Signature In some cases you might need this note as well:

Sperrvermerk

Diese Arbeit enthält vertrauliche Daten der . Veröffentlichungen oder Vervielfältigungen dieser Arbeit – auch auszugsweise – sind ohne ausdrückliche Genehmigung von nicht gestattet.

Confidentiality Note

This thesis contains confidential data of . It may not be disclosed, published or in any other matter made known – even in extracts – to any third party without the expressed written permission of .