A model of maximum employment growth with a one-third profit share

Abstract

The economies of the European Union and the United States have been predominantly wage-driven in recent decades, according to most empirical studies on the Bhaduri–Marglin model (1990). Nevertheless, since the 1980s, European governments have operated under the neoclassical belief that full employment can be achieved by reducing labour costs and increasing the profit share of income, a strategy that has proven effective, though the reasons remain a mystery (Storm and Naastepad, 2017). How could this happen? To explain these developments, the proposed new model of growth and distribution integrates the principles of chain reaction, creative destruction, effective demand, and the significance of income distribution, as outlined by Kaldor, Schumpeter, Keynes, and Ricardo, respectively. It has been theoretically demonstrated that employment growth reaches its maximum when profit share accounts for one-third of income. This relationship is illustrated by the evolution of the U.S. economy throughout the 20th century and by 17 advanced economies since 1961, the earliest year for which precise data is available. Thus, wages drive output and productivity growth, while employment growth is driven by the profit share when it is below the one-third threshold, and by the wage share when it exceeds that point.