Wages have a dual function in capitalist economies. They are a cost of production as well as a source of demand. An increase in the wage share has several effects on demand and whether actual demand regimes are wage led or profit led is subject to an ongoing academic debate. Our interpretation of the available evidence is that domestic demand regimes are likely to be wage led in most economies. In open economies the net export effects may overpower the domestic effects and total demand in many individual countries may well be profit led. However larger geographical (or economic) areas are likely to be wage led. The most recent empirical studies show that the world economy overall is in a wage-led demand regime and if all countries pursue pro-labour distributional policies simultaneously, even countries that are profit-led will experience increases in aggregate demand, their economic activity being driven up by faster growth abroad. This can be contrasted to a situation where all countries are pursuing an export-led strategy: it is clear that only half of them can be successful, as all countries cannot be simultaneously net exporters …

There is an alternative to neoliberalism. Indeed there needs to be an alternative to neoliberal policies, because the export-growth model is of limited use and generates global ￼imbalances, while the model based on debt-led consumption is unsustainable …

Distributional policies that are likely to increase the wage share and reduce wage dispersion include increasing or establishing minimum wages, strengthening social security systems, improving union legislation and increasing the reach of collective bargaining agreements. All of these policies go against orthodox economic wisdom and, under the perceived pressure to reduce public budget deficits, current economic policy seems to be moving in the opposite direction, with calls for government austerity policies, which are most likely to affect the middle class and the poor, and calls for structural reforms, which are a euphemism for more flexible labour markets and reduced wage rates. However, in times of crisis and a lack of effective demand, what economies need is more state involvement, not less. A successful policy package to economic recovery needs to have sustained wage growth as one of its core building blocks. Only when wages grow with productivity growth will consumption expenditures grow without rising debt levels.

To be successful a modern version of a wage-led growth strategy will also require a restructuring of the financial sector. The deregulated financial sector has fuelled speculative growth and resulted in the worst recession since the 1930s. If a repeat of the crisis is to be prevented, this will require managing international capital flows, a re-focusing of the financial sector on narrow banking, the elimination of destabilizing financial innovations, and a higher fiscal contribution of the financial sector (e.g., in the form of a financial transactions tax).

Marc Lavoie & Engelbert Stockhammer