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Demand effects of the falling wage share in Austria

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Abstract

This paper aims at empirically estimating the demand effects of changes in functional income distribution for Austria. Based on a Post-Kaleckian macro model, this paper estimates the effects of a change in the wage share on the main demand aggregates. The results for the behavioral functions for consumption, investment, prices, exports and imports are compared with the specifications of the WIFO macro model and the IHS macro model. A reduction in the wage share has a restrictive effect on domestic demand as consumption decreases more strongly than investment increases. Because of the strong effects on net exports the overall effects of a decrease in the wage share are expansionary. However the latter effect operates only as far as the fall in the wage share increases competitiveness. As wage shares were also falling in Austria’s main trading partners, the effect seems to have been neutralized.

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Notes

  1. Marterbauer and Walterskirchen (2003) investigate the Austrian case and highlight the role of unemployment. IMF (2007), and OECD (2007), investigate the effects of globalization, Breuss (2007) explicitly includes the effects of Eastern Enlargement.

  2. A discussion of what ‘mainstream’ economics is beyond the scope of this paper. As the most widely used macro models for Austria, the WIFO model and the IHS model by definition qualify as mainstream. Both are short run models with a Keynesian flavour which, on a theoretical level, is why the behavioural equations estimated are comparable, if different in detail, with our Post-Kaleckian model. New Keynesian macro models that use long run restrictions extensively, like the OeNB model (Fenz and Spitzer 2005), would be much more difficult to compare to our model.

  3. In the case of consumption one may argue that there is an indirect effect because a redistribution from, say, profits to wages will affect disposable income as part of profits are retained and thus do not enter disposable income.

  4. Assume a price equation of the form lnP = f(lnULC, zP). Real unit labor costs (RULC) defined as ULC/P and are identical to the wage share; thus lnΩ = lnULC − lnP. Then ePRULC = ePULC/(1 − ePULC), where ePRULC is the elasticity of prices with respect to RULC and ePULC is the elasticity of prices with respect to RULC.

  5. In the OECD data set that is used for the empirical analysis, ULC are defined as nominal wage costs divided by real productivity. Real unit labor costs are defined as nominal labor unit costs divided by the GDP deflator. Therefore, in this definition, real unit labor costs are identical to the wage share.

  6. Functional income distribution and its measure, the wage share, are used synonymously throughout this paper.

  7. Kaleckian economics is considered one of the main streams within Post Keynesian economics.

  8. The results of the unit root tests are reported in the Appendix (Table A2).

  9. Both the WIFO and the IHS are applying an ECM for the consumption function.

  10. Economic variables that are supposed to grow exponentially have to be used in logarithmic form in order to get stationary. See e.g. Stewart (2005, 742ff) for further discussion.

  11. The equation for durables additionally contains the long-term real interest rate as explaining variable.

  12. In the estimations of the IHS the interest rate is also not statistically significant. The WIFO is using a variable for capital cost, which is calculated from the inflation rate of capital goods, the nominal interest rate and a depreciation rate. Additionally, a factor for the Austrian tax system was included. The capital cost however only have a short-run effect. Unfortunately no information is given about the statistically significance of this variable. Similarly, Wesche (2000, p. 18) concludes from a study with firm-level data that “the traditional interest-rate channel is negligible for Austrian enterprises ”.

  13. This is only the short run value of the WIFO equation. Since a partial adjustment model is applied, the short run effect has to be corrected in order to determine the long run effect. However, this would increase the value to 1.91, which we consider implausibly high.

  14. The average effect is smaller than for 2005 because the wage share rose in the 1970s and fell afterwards.

  15. Nothing hinges on the particular measure of competitiveness that has been taken from the AMECO database for convenience. Other measures would broadly show a similar pattern.

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Acknowledgements

The authors are grateful to Amit Bhaduri, Kazimierz Laski, Özlem Onaran, Martin Riese, Anton Rainer and an anonymous referee for comments. Support from FWF Project Nr. P18419-G05 is acknowledged. The usual disclaimers apply.

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Authors and Affiliations

  1. Institut für Geld- u. Fiskalpolitik, Wirtschaftuniversität Wien, Augasse 2-6, 1090, Vienna, Austria

    Engelbert Stockhammer

  2. Österreichisches Institut für Wirtschaftsforschung, Postfach 91, 1103, Wien, Austria

    Stefan Ederer

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  1. Engelbert Stockhammer
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Correspondence to Engelbert Stockhammer.

Appendices

Appendices

Table A1 Variable definitions
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Table A2 Unit root tests
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Table A3 Cointegration tests
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Stockhammer, E., Ederer, S. Demand effects of the falling wage share in Austria. Empirica 35, 481–502 (2008). https://doi.org/10.1007/s10663-008-9069-0

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