Wage-led or profit-led economic growth : the case of Chile 1996-2017

Abstract

The main objective of this work is to estimate the effects of income redistribution on economic growth in Chile with a post-Kaleckian/post-Keynesian approach. We analyze the period between 1996-2017, identifying the effect of an increase in the profit share on aggregate demand. We seek to highlight the “forgotten” role of wages as a source of demand and try to understand the macroeconomic effects of inequality such as its impact on achieving long-term economic growth. Our main results show that an increase of 1%-point in the profit share will lead to a contraction of 0.44% in aggregate demand, which indicates that Chilean economic growth is wage-led. Furthermore, we use an innovative approach by testing whether economic growth is wage-led or profit-led. Allowing for possible transformations from one regime to the other over the period analyzed. The conclusions are that for a significant part of the period, economic growth in Chile was wage-led. Which means that in such period an increase in the wage rate would cause faster economic growth. In other words, improving income distribution would be consistent with faster economic growth.