Bowley's law

Bowley's law, also known as the law of the constant wage share, is a stylized fact of economics which
states that the wage share of a country, i.e., the share of a country's economic output that is given to
employees as compensation for their work (usually in the form of wages), remains constant over time.[1] It
is named after the English economist Arthur Bowley. Research conducted near the start of the 21st
century, however, found wage share to have declined since the 1980s in most major economies.

The term Bowley's law was first used by Paul Samuelson in 1964 in the sixth American edition of his
classic textbook Economics as a name for the stylized fact of a constant wage share. Thereby, Samuelson
meant to honor the economist Arthur Bowley, who pioneered the collection and statistical analysis of
wage data in the UK. Having already speculated in 1920 that the wage share might be constant and
having found (together with Josiah Stamp) evidence for his speculation in a comparison between the UK's
wage shares in 1911 and 1924, Bowley became the first to clearly assert the constancy of the wage share
in his 1937 book Wages and Income in the United Kingdom since 1860. This finding was remarkably at
odds with the teachings of classical economists like Ricardo who perceived the factor shares of land,
capital, and labor to be inherently flexible.

Research

Since its beginnings in the 1920s, empirical research on the distribution of factor shares has been
intimately tied to the development of national accounting. Due to the necessity of aggregating wage data
from different sources, many early studies on the growth or decline of the wage share, including Bowley's
and Kalecki's research in the 1930s, were fraught with measurement and comparability issues. As national
accounting in Great Britain and the United States improved, studies such as Phelps-Brown and Weber
(1953) or Johnson (1954) found wage shares to be constant. As a consequence, the constancy of the wage
share was widely accepted as stylized fact among economists, e.g. becoming part of Kaldor's facts on
modern economic growth. This consensus met strong empirical challenges in the late 1950s, e.g.
from Kuznets (1959) or Solow (1959). Even though academic interest in Bowley's law waned from the
1960s on, its impact on economic theory was profound. Through its influence on the macroeconomic
research of Kalecki and Keynes, it influenced Post-Keynesian economists like Joan Robinson who
developed macroeconomic theories able to account for the existence of a constant wage share.
Analogously, Bowley's law is reflected in the development of neoclassical wage theory by John
Hicks and Paul Douglas in the 1930s. Perhaps most importantly, the inclusion of Bowley's law as one
of Kaldor's facts, which neoclassical macroeconomics seek to explain, implies that it considerably shaped
the development of modern economic theory.

Only in the early 2000s did academic interest in Bowley's law begin to resurface. Since then a substantial
body of economic research has cast strong doubts on whether Bowley's law holds in post-1960 data. More
specifically, recent research strongly suggests that in most major economies, including the U.S., the wage
share has substantially and significantly declined since the 1980s.
Hicks–Marshall laws of derived demand

The Hicks–Marshall laws of derived demand assert that, other things equal, the own-
wage elasticity of demand for a category of labor is high under the following conditions:

 When the price elasticity of demand for the product being produced is high (scale effect). So when
final product demand is elastic, an increase in wages will lead to a large change in the quantity of the
final product demanded affecting employment greatly.
 When other factors of production can be easily substituted for the category of labor (substitution
effect).
 When the supply of other factors of production is highly elastic (that is, usage of other factors of
production can be increased without substantially increasing their prices) (substitution effect). That
is, employers cannot easily replace labor as doing so will lead to a large increase in other factor prices
making it useless.
 When the cost of employing the category of labor is a large share of the total costs of production
(scale effect)

Engel's law

An observation in economics stating that as income rises, the proportion of income spent on food falls,
even if absolute expenditure on food rises. In other words, the income elasticity of demand of food is
between 0 and 1.
The law was named after the statistician Ernst Engel (1821–1896).
Engel's law does not imply that food spending remains unchanged as income increases: It suggests that
consumers increase their expenditures for food products in percentage terms less than their increases in
income.
One application of this statistic is treating it as a reflection of the living standard of a country. As this
proportion — or "Engel coefficient" — increases, the country is by nature poorer; conversely a low Engel
coefficient indicates a higher standard of living.
The interaction between Engel's law, technological progress, and the process of structural change is
crucial for explaining long term economic growth as suggested by Leon, and Pasinetti.
Gresham's law

In economics, Gresham's law is a monetary principle stating that "bad money drives out good". For
example, if there are two forms of commodity money in circulation, which are accepted by law as having
similar face value, the more valuable commodity will gradually disappear from circulation.
The law was named in 1860 by Henry Dunning Macleod, after Sir Thomas Gresham (1519–1579), who
was an English financier during the Tudor dynasty. However, the concept itself had been previously
expressed by others, including by Aristophanes in his play The Frogs, which dates from around the end of
the 5th century BC, in the 14th century by Nicole Oresme c. 1350, in his treatise On the Origin, Nature,
Law, and Alterations of Money, and by jurist and historian Al-Maqrizi (1364–1442) in the Mamluk
Empire; and in 1519 by Nicolaus Copernicus in a treatise called Monetae cudendae ratio For this reason,
it is occasionally known as the Gresham–Copernicus law

Application

The principles of Gresham's law can sometimes be applied to different fields of study. Gresham's law may
be generally applied to any circumstance in which the true value of something is markedly different from
the value people are required to accept, due to factors such as lack of information or governmental decree.
In the market for used cars, lemon automobiles (analogous to bad currency) will drive out the good
cars. The problem is one of asymmetry of information. Sellers have a strong financial incentive to pass all
used cars off as good cars, especially lemons. This makes it difficult to buy a good car at a fair price, as
the buyer risks overpaying for a lemon. The result is that buyers will only pay the fair price of a lemon, so
at least they reduce the risk of overpaying. High-quality cars tend to be pushed out of the market, because
there is no good way to establish that they really are worth more. Certified pre-owned programs are an
attempt to mitigate this problem by providing a warranty and other guarantees of quality. "The Market for
Lemons" is a work that examines this problem in more detail. Some also use an explanation of Gresham's
Law as "The more efficient you become, the less effective you get"; i.e. "when you try to go on the cheap,
you will stop selling" or "the less you invest in your non-tangible services, the fewer sales you will get."
Verdoorn's law

Verdoorn's law is named after Dutch economist Petrus Johannes Verdoorn [nl] (1949). The Verdoorn's Law
states that in the long run productivity generally grows proportionally to the square root of output.
In economics, this law pertains to the relationship between the growth of output and the growth
of productivity. According to the law, faster growth in output increases productivity due to increasing
returns. Verdoorn (1949, p. 59) argued that “in the long run a change in the volume of production, say
about 10 per cent, tends to be associated with an average increase in labor productivity of 4.5 per cent.”
The Verdoorn coefficient close to 0.5 is also found in subsequent estimations of the law. reports a 0.484
coefficient.

Description

The Verdoorn's Law describes a simple long-run relation between productivity and output growth, whose
coefficients were empirically estimated in 1949 by the Dutch economist.
The relation takes the following form:
where p is the labor productivity growth, Q the output growth (value-added), b is the Verdoorn coefficient
and a is the exogenous productivity growth rate.
Verdoorn's law differs from “the usual hypothesis … that the growth of productivity is mainly to be
explained by the progress of knowledge in science and technology”, as it typically is in neoclassical
models of growth (e.g. the Solow model). Verdoorn's law is usually associated with cumulative causation
models of growth, in which demand rather than supply determine the pace of accumulation.
Nicholas Kaldor and Anthony Thirlwall developed models of export-led growth based on Verdoorn's law.
For a given country an expansion of the export sector may cause specialisation in the production of export
products, which increase the productivity level, and increase the level of skills in the export sector. This
may then lead to a reallocation of resources from the less efficient non-trade sector to the more productive
export sector, lower prices for traded goods and higher competitiveness. This productivity change may
then lead expanded exports and to output growth.
Thirlwall (1979) shows that for several countries the rate of growth never exceeds the ratio of the rate of
growth of exports to income elasticity of demand for imports. This implies that growth is limited by the
balance of payments equilibrium. This result is known as Thirlwall's Law.
Sometimes Verdoorn's law is called Kaldor-Verdoorn's law or effect.