Wage-led versus profit-led demand regimes: the long and the short of it

Abstract

Empirical studies have found mixed results regarding whether various countries have wage-led or profit-led demand regimes. Most of the previous literature has paid little attention to the time dimension of this distinction, but most of the studies that have found profit-led results have used methodologies that emphasize short-run cyclical relationships. This paper argues that demand is more likely to be profit-led in the short run and more likely to be wage-led in the longer term, because the positive effects of lower labor costs on investment and net exports are likely to be strongest in the short run, while the positive effects of a higher wage share on consumption are likely to be strongest in the longer term, at least in the US case (other countries may differ).