Endogenous income distribution and aggregate demand: Empirical evidence from heterogeneous panel structural vector autoregression

Abstract

This paper presents a novel empirical investigation into demand and distribution dynamics using a heterogeneous panel structural vector autoregression model for a panel of 10 emerging economies during the 1970-2017 period. Following the Kaleckian tradition, the theoretical analysis is based on a dynamic macro model where distributive shares and labor productivity are determined endogenously by introducing conflicting-claims theory of inflation and Kaldor-Verdoorn effects. The paper indicates profit-led demand regime only in the short run and profit-squeeze effects when allowing for the contemporaneous effect of labor share on capacity utilization and capital accumulation. However, after incorporating the contemporaneous effect of demand on labor share and thus controlling for the short-term effect of pro-cyclical labor productivity on labor share, the results provide evidence for wage-led demand and wage-squeeze effects. These results underline how the importance of addressing endogeneity issues when estimating demand and distribution regimes and how different assumptions about the interactions among demand, distribution, and labor productivity result in diverse findings.