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Final presentation

Final presentation. Endogenizing productivity in the Bhaduri-Marglin model. Bernhard Schütz a.Univ.Prof. Dr. Martin Riese WS 2008/09. Overview. What‘s the Bhaduri-Marglin model? Why endogenous productivity? Endogenous productivity in other post-Keynesian models

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Final presentation

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  1. Final presentation Endogenizing productivity in the Bhaduri-Marglin model Bernhard Schütz a.Univ.Prof. Dr. Martin Riese WS 2008/09

  2. Overview • What‘s the Bhaduri-Marglin model? Why endogenous productivity? • Endogenous productivity in other post-Keynesian models • Endogenous productivity in the Bhaduri-Marglin model Endogenizing productivity in the Bhaduri-Marglin model

  3. The Bhaduri-Marglin model

  4. The Bhaduri-Marglin model I Focus: What‘s the influence of real wagerestraint on output? Lower real wages lead to: • Lower wage cost, which means higher profits  higher investment demand • Lower purchasing power  lower consumption demand Endogenizing productivity in the Bhaduri-Marglin model

  5. The Bhaduri-Marglin model II • Starting point: Y = C + I  I = S • Investment: I = I(h,z) • h = / Y...profit share • z = Y / Y*...capacity utilization (…total profits, Y*...potential output) Endogenizing productivity in the Bhaduri-Marglin model

  6. The Bhaduri-Marglin model III • Saving: Y*=1  S = shz • Profit share (h): w...real wage rate …labor productivity Endogenizing productivity in the Bhaduri-Marglin model

  7. The Bhaduri-Marglin model IV • Equilibrium condition: I(h,z) = shz • Total differentiation yields: Endogenizing productivity in the Bhaduri-Marglin model

  8. The Bhaduri-Marglin model V Real wage restraint (increase in the profit share) leads to: • A rise in z if the responsiveness of investment (to a change in h) is strong • A fall in z if the responsiveness of investment (to a change in h) is weak Endogenizing productivity in the Bhaduri-Marglin model

  9. Endogenous productivity other in post-Keynesian growth models

  10. Endogenous productivity other in post-Keynesian growth models: • Raghavendra (2006): • Hein (2004): • Cassetti (2003): • Naastepad (2006): • Bhaduri (2006): Endogenizing productivity in the Bhaduri-Marglin model

  11. Endogenous labor productivity in the Bhaduri-Marglin model

  12. Prerequisite Deriving with respect to w instead of h yields (no change in meaning):  Endogenizing productivity in the Bhaduri-Marglin model

  13. Economies of scale

  14. Economies of scale I • Higher capacity utilization leads to higher labor productivity: • Productivity influences the profit share: Endogenizing productivity in the Bhaduri-Marglin model

  15. Economies of scale II Result: • No change in the numerator • Can the denominator turn negative? Endogenizing productivity in the Bhaduri-Marglin model

  16. Economies of scale III Keynesian stability condition must be valid: This is equal to , which means that the denominator cannot turn negative for stability reasons. Endogenizing productivity in the Bhaduri-Marglin model

  17. Economies of scale IV Interpretation of the result: • dz/dw > 0 if • dz/dw < 0 if • dz/dw increases in the profit-led demand regime • dz/dw decreases in the wage-led demand regime Endogenizing productivity in the Bhaduri-Marglin model

  18. The wage-effect

  19. The wage-effect I Higher real wages increase productivity by • increasing the firm‘s incentive to invest into labor productivity raising techniques (Naastepad 2006) • eliminating less efficient firms from the market („Webb-effect“) (Lavoie 1992) • creating more motivated workers (efficiency wage theory)  Effect on the profit share: Endogenizing productivity in the Bhaduri-Marglin model

  20. The wage-effect II Result: • No change in the denominator • If < 1, the effect of real wage restraint on z is smaller than before, because the gain in profit share is smaller • If > 1, lower real wages cause a fall in the profit share. This means that dz/dw > 0 in the profit-led regime Endogenizing productivity in the Bhaduri-Marglin model

  21. Investment effect

  22. Investment effect I • Firms try to gain advantage over each other by increasing their level of productivity. This leads to: • new methods of production • more technically advanced types of capital • The effect of the presence of more technically advanced capital is a rise in the aggregate level of labor productivity. If other firms want to apply the new techniques in the production process, they have to invest in new capital.  Endogenizing productivity in the Bhaduri-Marglin model

  23. Investment effect II Result: • Additional negative term in the denominator: Any negative (positive) effect of real wage restraint on z will be larger because of the additional negative (positive) effect of lower (higher) demand on investment (through labor productivity) • Additional positive term in the numerator: Real wage restraint has an additional negative effect on investment (through its negative impact on labor productivity) Endogenizing productivity in the Bhaduri-Marglin model

  24. Investment effect III • Any effect of real wage restraint on capacity utilization will be bigger (because the denominator is smaller) • The possibility for real wage restraint to have a negative impact on capacity utilization increased (because of the additional positive term in the numerator) Endogenizing productivity in the Bhaduri-Marglin model

  25. Summary

  26. Summary I If only the influence of z on labor productivity is considered, • the condition from the original BM-model holds: dz/dw > 0 if • changes in productivity influence the size of the effect, increasing it in a profit-led demand regime and decreasing it in a wage-led demand regime. Endogenizing productivity in the Bhaduri-Marglin model

  27. Summary II If also an effect of the real wage rate on labor productivity is considered, • the condition from the original BM-model for dz/dw > 0 ( ) remains only valid if < 1 • the impact of real wage restraint on output is zero if = 1 • the impact of real wage restraint on output is generally smaller if < 1, because losses in productivity affect the profit share negatively • real wage restraint leads to a loss in z in a profit-led demand regime if > 1 because of the large drop in productivity Endogenizing productivity in the Bhaduri-Marglin model

  28. Summary III If a positive impact of labor productivity on investment is taken into account, • any effect of real wage restraint on capacity utilization will be bigger in general • a negative impact of real wage restraint on capacity utilization becomes more likely Endogenizing productivity in the Bhaduri-Marglin model

  29. Conclusion Real wage restraint and productivity influence the economy in many more ways than recognized in the Bhaduri-Marglin model. That’s the reason why, by ignoring labor productivity in their analysis, Bhaduri and Marglin were too simplistic. Endogenizing productivity in the Bhaduri-Marglin model

  30. Thank you for your attention!

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