Distribution and Growth in France and Germany: Single Equation Estimations and Model Simulations Based on the Bhaduri/Marglin Model

Abstract

We analyse the relationship between functional income distribution and economic growth in France and Germany from 1960 until 2005. The analysis is based on a demand-driven distribution and growth model for an open economy inspired by Bhaduri & Marglin (1990), which allows for profit- or wage-led growth. First, we apply a single equation approach, estimating the effects of redistribution on the demand aggregates and summing up these effects in order to obtain the total effect of redistribution on GDP growth. Since interactions between the demand aggregates are omitted from this approach, we also apply a simulation approach taking into account these interactions. In the single equation approach we find that growth in France was wage-led, whereas the effect in Germany was undetermined. The results of the simulation approach, however, suggest that the wage-led nature of growth in France becomes even more pronounced when considering the interactions between the demand aggregates, while in Germany the simulations show a tendency towards wage-led growth in the longer run.

Acknowledgment

For helpful comments we would like to thank Till van Treeck, Rudolf Zwiener and two anonymous referees. Remaining errors are, of course, ours.

Notes

¹See Kalecki (1954, 1971) and Steindl (1952) as well as the surveys in Lavoie (1992, pp. 297–347), Blecker (2002) and Hein (2004, pp. 177–219).

²See Hein & Vogel (2008) for a survey of empirical studies based on the Bhaduri/Marglin-model and a discussion of potential reasons for different results.

³See ‘Data definitions and Data Source’ in the appendix.

⁴We refrained from adjusting profits or the profit share to changes in the share of employees in total employment because this adjustment (and the calculation of a labour income share) has to rely on the rather arbitrary assumption of average labour income of the employers being equal to average labour income of the employees. Here we assume that in the behavioural equations to be estimated and in the model to be simulated it is unadjusted profits or the unadjusted profit share that matters.

⁵The results of the CUSUM and the CUSUM of squares tests can be obtained from the authors upon request. We also attempted to estimate single equations for different sub-periods, following the suggestion of a regime shift from wage-led to profit-led in the early 1970s by Marglin & Bhaduri (1990, 1991) and of a possible re-shift in the 1980s by Hein & Krämer (1997), but were not able to find evidence in the data.

⁶See ‘Estimation Strategy in the Single Equation Approach’ in the appendix.

⁷Estimating equation (15b) as a difference equation did not yield plausible results.

⁸We tried different specifications, but we were not able to find a significant effect of the profit share on net exports for France. See also Hein & Vogel (2008).

⁹In Hein & Vogel (2008) we refrained from estimating the net exports function in differences and argued that from a theoretical point of view the share of net exports in GDP and the profit share have to be stationary in the long run. With this specification we were not able to estimate any significant effect of an increase in the profit share on the growth contribution of net exports in Germany when applying the strict significance criterion and only a small positive effect under the ‘weak significance’ criterion. Naastepad & Storm (2007) in a recent paper covering a similar period (1960–2000) obtained a significant but very small effect of redistribution on net exports for Germany applying a somewhat different estimation method. Bowles & Boyer (1995), however, find a similarly strong impact as we do in this paper, but for a different time period (1961–1987). The results of the net export function should therefore be interpreted with great care.

¹⁰Results for the deviation of the model baseline from the actual data can be obtained from the authors upon request.

¹¹It should not come as a surprise that excluding the ‘weakly significant’ positive effect of the profit share from the investment function, and therefore taking statistical significance seriously, amplifies the negative effect of a change in the profit share on GDP in the simulation exercise. Results can be obtained from the authors on request.

¹²In the single equations approach applied to six countries in Hein & Vogel (2008), we have found that only the small open economies Austria and the Netherlands were profit-led, whereas France, Germany, the UK and the US were wage-led.

¹³For Post-Keynesian models including monetary variables see the discussion in Lavoie (1995) and in Hein (2008, part II). For attempts to include the interest rate or other financial variables in empirical estimations of the Bhaduri/Marglin or other Kaleckian models see Hein & Ochsen (2003), van Treeck (2007) and Stockhammer (2004a, 2004b, 2005–06).

¹⁴See Marglin & Bhaduri (1990, 1991), Gordon (1995) and Bhaduri (2006a) for the discussion of feedback effects between economic activity and growth, on the one hand, and distribution on the other.

¹⁵See Kaldor (1957), León-Ledesma & Thirlwall (2002), Dutt (2003, 2006), Bhaduri (2006b, 2006c), Naastepad (2006), and Vogel (2009).