Three Essays on Income Distribution and Induced Technical Change

The distributive conflict is a key characteristic of capitalist economies. Although typically neglected in neoclassical literature, the role of power relations among social classes has always been at the very core of the theories falling within the classical-Keynesian paradigm. Most notably, the classical-Marxian approach to the theory of distribution-induced technical change has emphasized the role of labour-saving innovations as a crucial device in the distributive conflict to prevent workers from undermining the capitalists’ economic and social position. This thesis is a collection of three essays aimed at analyzing the interplay between labour market institutions, technical change, and income distribution in labour-constrained economies in light of the theory of induced technical change. More specifically, it deploys the theory of induced technical change to contribute to the debates on (i) the relationship between the decline in the labour share and stagnation of income and labour productivity in mature economies, (ii) the determinants of wage inequality and skill-biased technical change in a growth context, and (iii) the empirical evidence on the distributive cycle and the changing pattern of cyclicality of wages and labour productivity in the US economy. Chapter I works out a Kaleckian model of a labour-constrained economy with induced innovation. The traditional “underconsumptionist” Kaleckian argument – i.e. in demand-led economies, a decline in the labour share slows down capital accumulation via reduced consumption demand – is briefly contrasted with the more recent classical/Goodwinian narrative on secular stagnation – i.e. in labour-constrained economies, a decline in the labour share slows down long-run capital accumulation via reduced pressure to innovate. Then, three modifications are made to a standard Kaleckian model with a Bhaduri-Marglin investment function: (a) the economy is labour-constrained, (b) the employment rate hurts the investment rate of firms, and (c) labour productivity growth is endogenous to the labour share. This essay shows that, conditional on institutional shocks, the long-run rate of growth of the economy is increasing in the labour share, irrespective of the short-run demand and growth regime of the economy, consistently with a classical/Goodwinian argument. Conversely, the demand and growth regime of the economy appears to be still crucial for assessing the long-run effects of income distribution conditional on technology shocks. Chapter II extends the basic classical-Marxian framework with distribution-induced technical change to include both high-skilled- and low-skilled-labour-saving innovations. The economy is assumed to face labour supply constraints only in the high-skilled segment of the labour market. Thus, the profit share interacts with the high-skilled employment rate, whereas the low-skilled labour supply is perfectly elastic. The essay then evaluates the steady-state effects of labour market institutions in a model economy in which both high-skilled- and low-skilled-labour productivities are made endogenous to income distribution and contrasts them with both the neoclassical account of skill-biased technical change and the standard Goodwin model with induced innovation. It is argued that, in contrast to the neoclassical view, skill-biased technical change is induced by exogenous shocks to the relative bargaining positions of high-skilled and low-skilled workers. Since the induced skill bias of technical change fully passes through to real wages at the steady state, labour market institutions are the ultimate driver of wage inequality. Chapter III tests an extended version of the Goodwin model for the US economy (1948-2019) that includes aggregate demand and decomposes the labour share into real wages and labour productivity. The four-dimensional SVAR is identified by means of a non-recursive identification strategy with restrictions motivated by classical-Keynesian growth theory, as in more recent empirical works on the distributive cycle. The essay shows that: (a) the empirical evidence is consistent with distribution-induced innovation in both the post-war period (1948-1984) and the Great Moderation (1985-2019), (b) the argument of procyclical labour productivity invoked by Kaleckian authors to question the source of the Goodwin pattern is not well-founded; (c) the US economy exhibits profit-led activity at business cycle frequencies, though it appears to be driven more by technology than by distributive shocks. Moreover, it is argued that the vanishing procyclicality of US labour productivity during the Great Moderation can be explained by a lessened incentive to invest in labour-saving innovations in the expansionary phase of the business cycle. Thus, the decline in the cyclical correlation between output and productivity can be linked to the breakdown of the cyclical profit squeeze through the theory of induced innovation.