Date of Submission

Spring 2015

Academic Programs and Concentrations

Economics

Project Advisor 1

Olivier Giovannoni

Abstract/Artist's Statement

This paper aims to answer two major conundrums in macroeconomic theory with regards to the U.S. economy. First, standard macroeconomic models such as Harrod-Domar and Solow theoryze that factor shares are constant; however, actual measures of the U.S. labor share have been on a downward trend since the early 1980s. The second conundrum relates to the Post-Kaleckian wage-led or profit-led view of economic growth. It indicates that a fall in the labor share in a wage-led economy will result in a fall in aggregate demand (due to deceases in consumption), and an increase in aggregate demand in a profit-led economy (due to increases in investment). However, the consumption share of GDP in the U.S. has been increasing and the investment share has been stable in spite of the falling labor share.

We argue that the resolution of these conundrums involves reexamining the standard Keynesian consumption function, both theoretically and empirically. Thus, we propose an original theory of consumption based on the principles of Duesenberry's (1949) Relative Income Hypothesis. We find that the economic consequence of a falling labor share in the United States is that aggregate demand growth, despite remaining wage-led, has become increasingly dependent on the accumulation of household debt. Furthermore, we conclude that there are four ominous outcomes associated with this dependence on household debt: unstable growth, sluggish growth, stagnation and economic contraction.

Open Access Agreement

Open Access

Creative Commons License

Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.

Download

This work is protected by a Creative Commons license. Any use not permitted under that license is prohibited.

Share

COinS