PhD-Project: Factor Shares and Inequality – Macroeconomic Effects and Interdependence

Franz Prante (PhD candidate Université Paris 13, HWR Berlin, IPE Berlin)
Supervisors: Prof. Eckhard Hein, HWR Berlin; Prof. Marc Lavoie, Université Paris 13

About

This dissertation project investigates the macroeconomic effects of changes in factor income shares (functional income distribution) and personal income inequality as well as the relationship between both distributional dimensions. The project seeks to contribute to an understanding of those dynamics of modern capitalism that led to rising income and wealth polarization connected to different macroeconomic regimes in different countries, which paved the way for the financial crisis and the Great Recession as well as the widespread stagnation tendencies that followed both events.

The first question that the dissertation investigates concerns the effects of changing personal income distribution on aggregate consumption and saving. The crucial role of interdependent social norms, institutions and regulations in determining these effects is to be investigated briefly as a first step. This will then translate into a specification of the potential relationships within a more comprehensive, yet relatively simple demand-led macroeconomic model including functional income distribution. Here the first central question of the thesis will be investigated: What are the potential macroeconomic effects of changes in both, personal and functional income distribution on aggregate demand and growth considering the relative strength of absolute and relative income effects determined by interdependent consumption and financing norms and a specific institutional setting? This will also include a discussion of the endogeneity of these effects with respect to distributional changes. A second and related question to be answered concerns the ways in which the consideration of aggregate consumption and saving effects of changes in personal income distribution can change the demand and growth regimes with respect to changes in functional income distribution from a theoretical point of view? After discussing these questions on a theoretical level, empirical evidence regarding the relationship between both distributional dimensions and aggregate consumption (saving) in different countries will be reviewed and compared with own estimations.

The second major question to be answered is on the relationship between personal and functional income distribution, with wealth distribution as a major point of connection between the two. How are both distributional dimensions related to each other from a logical (i.e. accounting) view and from a theoretical perspective? What are the determinants of the specific relationships? What are the implications of these relationships in terms of different distributional changes? After systematically investigating these theoretical questions, I will ask what the empirical evidence suggests for the relationship between personal and functional income distribution in different countries. Furthermore, I will ask which feedback effects of aggregate demand, capital accumulation and growth on functional and personal income distribution need to be considered for a comprehensive investigation of distributional dynamics and their macroeconomic effects.

A final set of questions is related to domestic and global economic developments surrounding the recent global financial and economic crisis: What was the role of both distributional dimensions for macroeconomic developments on domestic and international levels in the period before the Great Recession? How did they contribute to stagnation tendencies in major parts of the world economy in its aftermath? And which policy implications can be drawn from the theoretical and empirical evidence for the goals of tackling inequality and secular stagnation?

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