Overhead Labour Costs in a Neo-Kaleckian Growth Model with Autonomous Non-Capacity Creating Expenditures

ABSTRACT

A notable feature of income distribution is the widening wage differential among workers: there is a redistribution in favour of managers at the detriment of ordinary workers. The paper incorporates this distinction between overhead managerial labour and direct labour into a neo-Kaleckian growth model with target-return pricing, where an autonomously growing demand component ultimately determines the long-run path of an economy. Our aim is to explore the role of overhead labour costs in the coevolution of income distribution and economic growth. We find that the profit share becomes an increasing function of the rate of capacity utilization, implying that empirical research based on the post-Kaleckian specification of investment is likely to be biased in finding a profit-led regime. Our model also features convergence to a fully adjusted position. We examine the parametric conditions under which the model achieves a wage-led growth regime in the long run, in the restricted sense that both the average rates of accumulation and utilization decrease during the transitional dynamics arising from an upward adjustment of the normal profit rate. Moreover, it is shown that a more equitable wage distribution between managers and ordinary workers will strengthen the wage-led nature of the economy.

KEYWORDS:

• Neo-Kaleckian
• growth
• overhead labour
• autonomous expenditures
• target-return pricing

JEL CODES:

• E11
• E37
• O41

Acknowledgments

We thank the two anonymous referees of the journal for their detailed comments which certainly helped to clarify some of the statements of our paper. This research has benefitted in the past from a grant for the study of income distribution issues provided by the Institute for New Economic Thinking (INET). The paper was presented at the 22nd Conference of the Forum for Macroeconomics and Macroeconomic Policies (FMM) in October 2018.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 A large part of this discrepancy in annual salary income can be attributed to the big difference in the number of hours worked per year. On the basis of a 50-week year, non-supervisory workers work 33.1 hours per week, while supervisory workers appear to compile no less than 58.6 hours per week. The discrepancy in worked hours is similar throughout the 1964–2010 period.

2 As far as we know, Rolim (2019) is the only empirical work on wage-led and profit-led demand regimes that splits the wage share into the shares going to supervisory and non-supervisory personnel. More about this will be said in the conclusion.

3 Other formulations of the wage remuneration of overhead labour are possible. Lavoie (2009, p. 390) suggests that the real wage of overhead workers be a given, thus avoiding that autonomous increases in the mark-up of firms reduce their real remuneration.

4 As Kaldor (1964, p. xvi) puts it, ‘short-period labour costs per unit of output are not constant, but falling (mainly on account of the influence of “overhead labour”)’.

5 Of course, some of the non-supervisory workers may dissave, but we shall assume that as a group they neither save nor dissave. Similarly, a fraction of supervisory workers may be dissaving by getting access to credit. Explicit dissaving by direct workers would require an analysis of household debt and wealth dynamics, which would greatly complicate the model, as others who have dealt with poor and rich households have found out in previous articles, and it would lead us away from our main task.

6 These two components of saving and dissaving by managers are among the peculiarities of our model compared to Lavoie (1995, 2014) for instance.

7 This comes down, as mentioned earlier, to assume that shareholders are at the same time managers. Making a distinction between managers (who earn salaries, save and hence receive profits on their accumulated financial wealth) and pure capitalists (who only receive capital income) would imply the consideration of three classes and the addition of the dynamics of the shares of capital accumulated by managers on one hand and pure capitalists on the other, and thus make our model even more complex. Ederer and Rehm (2020) have something of the sort, with either workers who save and capitalists who don’t work in their basic model, or with both workers and managers who work and save in their extended model, thus considering in both models the determinants of their respective shares of financial capital with differential rates of return. Dutt (1990), assuming the presence of pure capitalists and workers who save, as did Pasinetti (1962), was the first author to examine the endogenous determination of the shares of wealth in a neo-Kaleckian model. Palley (2017) has a structure similar to Ederer and Rehm’s extended model, but his shares of wealth are exogenous.

8 Target-return pricing is a specific version of normal-cost pricing, where the estimated unit cost is calculated at the standard rate of capacity utilization, which corresponds to normal output, also called nowadays budgeted output (Lee 2013).

9 Original emphasis.

10 Weisskopf (1979) defined the corrected profit share by multiplying the income share of overhead labour by the ratio of output relative to full-capacity output, but consistency with the target-return formula requires that it be multiplied by the ratio of output relative to normal output.

11 This is also true of a change in the proportion of supervisory workers, measured by $f$ at full capacity. However, we focus on $\sigma$ because, as recalled in the introduction, the variable f seems to have hardly changed through time.

12 Some readers may wonder why we don’t use the investment function advocated by Bhaduri and Marglin (1990), with the share of profits as an additional component to the function used here. Besides the reason given in the main text, with overhead costs the share of profits becomes an endogenous variable that does not measure profitability at normal capacity utilization. Furthermore, Pariboni (2016, p. 426) has shown that in a model with autonomous non-capacity creating expenditures and the Bhaduri-Marglin investment function, the profit-led regime ‘is no longer a feasible option: an increase in the profit share leads to a reduction in the equilibrium degree of capacity utilization, regardless of the relative magnitude of the parameters involved’. There is thus no advantage in making use of this more complicated investment function.

13 As an illustration if the retention ratio of firms is 0.6 while the propensity to save of managers is 0.1, and with a normal rate of utilization equal to 0.8, an increase in $\sigma$ will have a negative impact on the rate of utilization as long as $u^{\ast }>0.675$. So this should be the more frequent case.

14 Obviously, in the case where managers do not save ($s_h=0$), there will be no shift of the demand-side profit-share curve, as occurred in Lavoie (1995). Note that we consider only the case where the profit-share curve (equation 10) is steeper than (equation 23) as in Figure 4(B) because the rate of utilization must decrease when there is an increase in the target rate of return, as shown by the sign of the derivative given by equation 15, and this can only happen if the slope of equation 10 is steeper than that of equation 23.

15 Considering the data presented in Figure 1, we can assume that the employment share of overhead labour at full capacity is 0.2. This implies we can pinpoint the value of $f$ being close to 0.2. Also, considering that the overhead salary rate is close to the quadruple of the wage rate obtained by direct workers, we can pinpoint the value of $\sigma$ being close to 4. Hence, we may safely assume that $\sigma f<1$, in accordance with the empirical facts.

16 If the ${\pi }^s$ curve shifts upward less than the ${\pi }^d$ curve does, i.e., $\mathrm{\partial }{\pi }^s/\mathrm{\partial }{r}_n<\mathrm{\partial }{\pi }^d/\mathrm{\partial }{r}_n$, then the rate of utilization increases after an increase in $r_n$. If the degree to which the two curves shift is the same, i.e., $\mathrm{\partial }{\pi }^s/\mathrm{\partial }{r}_n=\mathrm{\partial }{\pi }^d/\mathrm{\partial }{r}_n$, then the rate of utilization stands still, since the increase in the utilization rate due to the upward shift of the ${\pi }^d$ curve exactly offsets the decrease in it due to the same amount of vertical shift of the ${\pi }^s$ curve. However, these two cases are ruled out because equation 15 must hold.

17 When $s_h=0$, the ${\pi }^d$ curve given by equation 23 does not shift at all when there is a change in $r_n$ and hence an increase in $r_n$ necessarily leads to a fall in the profit share.

18 This point has been recognized from the recent experiences in South Korea, where the policies for ‘income-led growth’ have been implemented, but where it has been observed that the fragmentation of the labour market is a major structural obstacle to the success of the policies. For more on this, see Nah (2018) and Joo et al. (2020).

19 In the working paper version of this article (Nah and Lavoie 2018), we have provided figures illustrating numerical simulations which show that changes in the target rate of return or in the wage premium of overhead labour can produce transitional dynamics that generate a clockwise loop in the ($u,\pi$) space, and thus loops similar to those defending the neo-Goodwinian profit-led/profit-squeeze story, thus generating a pseudo-Goodwin loop.