Do profits affect investment and employment? An empirical test based on the Bhaduri-Marglin model.

In this study, a Kaleckian-Post-Keynesian macroeconomic model, which is an extended version of the Bhaduri and Marglin (1990) model, serves as the starting point. The merit of a Kaleckian model for our purposes is that it highlights the dual function of wages as a component of aggregate demand as well as a cost item as opposed to the mainstream economics, which perceive wages merely as a cost item. Depending on the relative magnitude of these two effects, Kaleckian models distinguish between profit-led and wage-led regimes, where the latter is defined as a low rate of accumulation being caused by a high profit share. Are actual economies wage-led or profit-led? Current orthodoxy implicitly assumes that they are profit-led, and thus supports the neoliberal policy agenda. The purpose of the paper is to carry this discussion into the empirical terrain, and to test whether accumulation and employment are profit-led in two groups of countries. We do so by means of a structural vector autoregression (VAR) model. The model is estimated for USA, UK and France to represent the major developed countries, and for Turkey and Korea to represent developing countries. The latter are chosen since they represent two different export-oriented growth experiences. The results of the adjustment experiences of both countries are in striking contrast to orthodox theory, however they also present counter-examples to each other in terms of their ways of integrating into the world economy.