Personal income inequality and aggregate demand

Abstract

This paper presents a theoretical and empirical investigation of how changes in the size distribution of income can affect aggregate demand and the demand regime of an economy. After presenting empirical evidence for the US economy that the propensity to save increases significantly from the bottom to the top quintile of wage earners, we demonstrate that more equal distributions always lead to higher output in the traditional neo-Kaleckian macroeconomic model. We also present conditions under which a reduction of income inequality among workers turns demand more wage-led. This view is supported by the results of an econometric study for the United States (1967-2010) which show that the rise after 1980 in income inequality has made the US economy more profit-led.

Involvement of a Capitalist Crisis in the 1900-30 Inequality Trend Reversal

“…When inequality again reached high levels early in the 21 st century, capital productivity again began to decline (see Figure 5). Carvalho and Rezai (2015) demonstrate that more equal distributions always lead to higher output in a standard neo-Kaleckian macroeconomic model, providing theoretical support for the idea expressed by Figure 5. Cynamon and Fazzar (2015) show that the rise in US household income inequality since 1980 can explain the entire magnitude of the Great Recession and the slow and prolonged recovery since.…”

Untitled

“…We will take a closer look at the results in Barbosa-Filho and Taylor (2006), because that paper has been the starting point for several other papers (Carvalho and Rezai 2016;Kiefer and Rada 2015) and Stockhammer and Stehrer (2011) The model is estimated for the US economy using quarterly data and the cyclical component of the Hodrick-Prescott (HP) filter. The specification uses two lags and no contemporaneous effects to avoid endogeneity problems.…”

Linking functional with personal income distribution: a stock-flow consistent approach

“…Functional income distribution influences consumption, because of the different propensities to consume out of different types of income; it also influences investment primarily due to its impact on profitability and the utilisation rate. 1 Personal income distribution affects consumption expenditures since the same source of income is likely to be distributed to households with different propensities to consume (see Carvalho and Rezai 2014;Palley 2015). In the second stage, distribution-induced changes in economic activity influence the bargaining power of workers in the wage-setting procedure and the ability of firms to increase the prices of their products, with profound effects on the income distribution between wages and profits; they also influence the proportion of households that receive income from unemployment benefits and, potentially, the distribution of the wage bill among households.…”