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### 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
- Endogenous productivity in the Bhaduri-Marglin model

Endogenizing productivity in the Bhaduri-Marglin model

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

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

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

The Bhaduri-Marglin model IV

- Equilibrium condition: I(h,z) = shz
- Total differentiation yields:

Endogenizing productivity in the Bhaduri-Marglin model

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

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

Prerequisite

Deriving with respect to w instead of h yields (no change in meaning):

Endogenizing productivity in the Bhaduri-Marglin model

Economies of scale I

- Higher capacity utilization leads to higher labor productivity:
- Productivity influences the profit share:

Endogenizing productivity in the Bhaduri-Marglin model

Economies of scale II

Result:

- No change in the numerator
- Can the denominator turn negative?

Endogenizing productivity in the Bhaduri-Marglin model

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

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

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

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

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

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

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

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

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

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

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

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