Capitalists, Workers, and Managers: Wage Inequality and Effective Demand
21 Pages Posted: 3 Jan 2018
Date Written: July 30, 2014
Abstract
We present a simple three-class model in the Kaleckian tradition to investigate the implications of a dominant managerial class for the dynamics of demand and distribution. Managers play a peculiar role in the economy, both because of their supervisory function --- which results in surplus extraction and wage inequality --- and because of their saving behavior. The adjustment of capacity utilization to accommodate goods market disequilibrium produces two distinct regimes with respect to the responsiveness of investment demand to profitability: a low investment--response regime, where effective demand appears to be both wage-led and inequality-led; and a high investment-response regime, where demand looks profit-led. In accordance with recent empirical evidence for the US, we introduce distributional dynamics that hinge on inequality squeezing workers' wage growth. We find that the low investment-responsiveness regime produces a stable demand-distribution equilibrium only if the wage squeeze effect is relatively small. On the other hand, the equilibrium in the high investment-response regime is saddle-path stable. The main distributional implication of the wage squeeze and inequality is that the effect of redistribution toward workers in both the low-investment response regime and the high investment response regime leads to declining inequality and capacity utilization. Hence, in both regimes, the inequality-led features of the equilibrium dominate the wage-led or profit-led nature of effective demand. These findings imply that distributive dynamics lead to a stronger basis for cohesion in the interests of managers and capitalists compared to workers and managers.
Keywords: Effective Demand, Capacity Utilization, Wage Inequality, Stability
JEL Classification: B5, E12, E22, E25
Suggested Citation: Suggested Citation