Income distribution and economic growth in Finland: Applying Bhaduri – Marglin model

Abstract

We apply Bhaduri and Marglin model to estimate the effect of income distribution on economic growth in Finland from 1975 to 2020. The Bhaduri-Marglin model is a post-Kaleckian model with the key assumption of different propensity to consume out of wages and out of profits. ARDL model is adopted to analyze the effect of profit share increase on aggregate demand components. Findings indicate that income redistribution towards profits leads to decline in economic growth due to fall in consumption, and it positively affects investments and net export due to increased international competitiveness through costs reduction; the first effect is stronger than two other effects. These results confirm the hypothesis about wage-led regime in Finland. The approach of Scandinavian countries and Finland to the role and effect of wages, for instance, differs from classical idea about the effect of wage restraint policy for increase in investments. Rise in wages is seen as a way to increase labor productivity. Since our findings indicate wage-led accumulation regime in Finland, this approach, being consistent with Bhaduri -Marglin model, seems more appropriate.