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Cambridge Journal of Economics Advance Access originally published online on July 14, 2008
Cambridge Journal of Economics 2009 33(1):139-159; doi:10.1093/cje/ben026
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© The Author 2008. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Functional income distribution and aggregate demand in the Euro area

Engelbert Stockhammer, Özlem Onaran and Stefan Ederer*

* Institut für Geld u. Fiskalpolitik, Vienna

Address for correspondence: Engelbert Stockhammer, Institut für Geld u. Fiskalpolitik, Wirtschaftuniversität Wien, Augasse 2–6, A1090 Vienna, Austria; email: engelbert.stockhammer{at}wu-wien.ac.at

An increase in the wage share has contradictory effects on the subaggregates of aggregate demand. Private consumption expenditures ought to increase because wage incomes typically are associated with higher consumption propensities than capital incomes. Investment expenditures ought to be negatively affected because investment will positively depend on profits. Net exports will be negatively affected because an increase in the wage share corresponds to an increase in unit labour costs and thus a loss in competitiveness. Therefore, theoretically, aggregate demand can be either wage-led or profit-led depending on how these effects add up. The results will crucially depend on how open the economy is internationally. The paper estimates a post-Kaleckian macro model incorporating these effects for the Euro area and finds that the Euro area is presently in a wage-led demand regime. Implications for wage policies are discussed.

Key Words: Distribution • Demand • Investment • Consumption • Foreign trade • Macroeconomics • Keynesian economics

JEL classifications: E12, E20, E22, E25, E61

Manuscript received February 19, 2007; final version received April 14, 2008.


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