A SIMPLE MODEL OF DEMAND-LED GROWTH AND INCOME DISTRIBUTION

Abstract

This paper presents a one-sector demand-led model where capital and non-capital expenditures determine income growth and distribution. The basic idea is to build a simple dynamical accounting model for the growth rate of the capital stock, the ratio of non-capital expenditures to the capital stock, and the labor share of income. By inserting some stylized behavioral functions in the identities, the paper analyzes the implications of alternative theoretical closures of income determination (effective demand) and distribution (social conflict). On the demand side, two behavioral functions define the growth rates of capital and non-capital expenditures as functions of capacity utilization (measured by the output-capital ratio) and income distribution (measured by the labor share of income). On the distribution side, another two behavioral functions describe the growth rates of the real wage and labor productivity also as functions of capacity utilization and income distribution. The growth rates of total factor productivity and employment follow residually from the accounting identities and, in this way, the demand-led model can encompass supply-driven models as a special case.