Growth and Inequality Revisited The Role Molero

Cambridge Journal of Economics Advance Access published June 23, 2016
Cambridge Journal of Economics 2016, 1 of 24

doi:10.1093/cje/bew017
Growth and inequality revisited: the role

of primary distribution of income. A new
approach for understanding today’s
economic and social crises
Downloaded from http://cje.oxfordjournals.org/ at Weizmann Institute of Science on June 25, 2016

Ricardo Molero-Simarro*
This paper presents an innovative interpretative scheme of the relationship between

economic growth and income inequality, taking the primary distribution of income
between profits and wages as the main explanatory variable. For that purpose, two
lines of research are taken as a reference point: first, the Bhaduri-Marglin Model,
which explains growth in terms of the effect that factor shares have on aggregate
demand; and second, recent empirical analyses that also use the functional distri-
bution to explain the evolution of the top income shares and the Gini index. After
reviewing the literature on the growth-inequality relationship, the paper identifies
several relationships between primary and interpersonal distributions of income in
each of the Bhaduri-Marglin Model’s growth regimes. It finds multiple causal rela-
tionships between growth and inequality as well as inequality and growth, clarifying
their implications for economic and social stability. The paper offers final reflections
on the way the scheme can further the understanding of current economic and
social crises.
Key words: Functional distribution of income, Factor shares, Aggregate demand,

Top incomes, Gini index
JEL classification codes: D31, E25, E64
1. Introduction
This paper seeks to develop an innovative interpretative scheme regarding the relation-
ship between economic growth and income inequality, taking the primary, so-called
factorial or functional, distribution of income as the main explanatory variable. For
this purpose, two main lines of research are referenced: first, the Bhaduri-Marglin
Manuscript received 25 February 2013; final version received 18 December 2015.

Address for correspondence: Ricardo Molero-Simaro, Calle Energía Solar, 1, Edificio G, 2ª planta. 41014,
Sevilla, Spain. Email: rmolero@ucm.es; rmolero@uloyola.es
* Departamento de Economía Aplicada I, Universidad Complutense de Madrid; Departamento de
Economía, Universidad Loyola Andalucía. The author wishes to acknowledge that the research leading to
this article was funded with a pre-doctoral research fellowship granted by the Universidad Complutense de
Madrid. This paper received useful comments from Luis Buendía García, Clara García Fernández-Muro
and Antonio Ramos Barrado. Edition advice was provided by the same Luis Buendía García and Miguel
Montanyà Revuelto. And the language of the initial versions of paper was improved by Richard Reive. He
would also like to thank the referees for providing useful comments which serve to substantially improve the
paper. Needless to say, all the remaining mistakes are his own.
© The Author 2016. Published by Oxford University Press on behalf of the Cambridge Political Economy Society.
All rights reserved.
Page 2 of 24 R. Molero-Simarro
Model (Bhaduri and Marglin, 1990), which explains growth in terms of the effect that
factor shares have on aggregate demand; and second, recent empirical analyses that
also use the functional distribution to explain the evolution of the Gini index and/or
the top income shares (Daudey and García-Peñalosa, 2007; Giovannoni, 2010; Adler
and Schmid, 2012; Schlenker and Schmid, 2013; Wolff, 2015).
Recently, the Bhaduri-Marglin Model has been applied to several national econo-
mies (Stockhammer and Onaran, 2012). However, the implications of those devel-
opments for the relationship between growth and inequality have not been further
explored. On the other hand, an increase in the top income share in disposable income
has been found as a result of the collection of household income statistics from sev-
eral countries’ fiscal data (Atkinson, Piketty and Saez, 2011). In particular, Thomas

Piketty’s (2014) Capital in the Twenty-First Century has attracted wide attention to the
issue of rising inequality. Nevertheless, several criticisms have arisen regarding his
treatment of the relationship between growth and income distribution (see, for exam-
ple, Fullbrook and Morgan, 2014).
Some analyses (Daudey and García-Peñalosa, 2007; Giovannoni, 2010; Adler and
Schmid, 2012; Schlenker and Schmid, 2013; Wolff, 2015) have related household or
individual disposable income inequality, measured by both quantiles of income shares
and the Gini index, to the evolution of factor shares. With few exceptions (Atkinson,
2009), most of those analyses have stated purely empirical relationships between the
primary and personal distribution of income. Indeed, Andrew Glyn concludes that
there is a ‘need for more research to uncover the causes of swings in factor shares and
to establish the links between functional and personal distribution of income’ (Glyn,
2009, p. 104).
The goal of this paper is to meet that need by analysing the implications that the
Bhaduri-Marglin Model’s outcomes have in terms of personal income inequalities. To
that end, we establish several relationships among factor shares, growth rates and the
evolution of household income quantile shares, according to the growth patterns con-
sidered by the Bhaduri-Marglin Model. This approach helps to identify multiple causal
relationships between inequality and growth, which, in turn, explain the contradictory
conclusions obtained by the authors who have analysed that relationship to date.
As we shall see, policies aimed at fostering economic growth in one Bhaduri-Marglin
growth regime or another could have either a positive or negative effect on income
inequality. Conversely, policies aimed at reducing inequality could have either a posi-
tive or negative effect on growth. Moreover, these seemingly paradoxical results may
help to understand why some contexts of marked inequality do not develop into social
or economic instability, in contrast to other contexts with fewer inequalities.
The next section reviews the principal literature that has tried to understand growth-
inequality and inequality-growth relationships. Then, Section 3 introduces the main
relationships between the functional distribution, aggregate demand and economic
growth. Section 4 posits the link between factor shares and interpersonal distribution
of income. In Section 5, by integrating these different contributions within a fully
consistent scheme, the paper seeks to overcome the causal logic that appears to be the
main weakness of previous explanations. Empirical evidence of the main relationships
stated is shown in Section 6, and the cases of China and the Eurozone are analysed in
more depth in Section 7. Finally, the paper concludes by discussing the main findings,
offering final reflections and presenting the main limitations of the analysis.
Growth and inequality revisited Page 3 of 24
2. Literature review: growth and inequality, inequality and growth
The relationship between economic growth and income distribution has been at the
core of economics since the emergence of political economy. Insofar as profits consti-
tute the main source of investment funding, income distribution is the last determi-
nant of the accumulation process and, consequently, the engine of economic growth.
David Ricardo declared that ‘to determine the laws which regulate distribution is the
principal problem in Political Economy’. In contrast, Karl Marx’s account of the inner
contradictions of capitalism and the ways the capitalist class seeks to avoid them was
rooted in the conflictive nature of the income distribution between the capitalist and
working classes.

The role of income distribution as a factor explaining growth fell into neglect with
the emergence of neoclassical economics. Resource allocation became the discipline’s
primary subject. In the neoclassical logic, achievement of efficiency through the market
mechanism was the only requirement for growth. Distribution came to be explained as
an outcome of a putative framework of perfect competition, as determined by capital
and labour supply as well as their respective marginal productivity. According to this
school of thought, factor substitution ensures saving and investment equality. Although
it has significant problems1, this has become the mainstream approach to account for
growth and distribution.
An alternative economic growth model was developed by Roy F. Harrod (1939)
and Evsey Domar (1946). However, they did not consider income distribution as an
explanatory variable for achieving equilibrium. Indeed, Nicholas Kaldor’s (1957) ‘styl-
ized facts’ later claimed that factor shares are constant. Robert Solow (1958) declared
himself ‘skeptical’ of the widespread belief ‘that the share of the national income accru-
ing to labour is one of the great constants of nature’ (op.cit., p. 618). Nevertheless, in
his model (Solow, 1956), Solow did not take into account the establishment of any
distributive pattern to ensure growth.
Champernowne (1953) analysed ‘the development through time of the distribution
of incomes’ as ‘a stochastic process’ (Champernowne, 1953, p. 319). He found that
‘the approximate observance of Pareto’s law … has its explanation in a similarity at dif-
ferent high income-levels of the prospects of given proportionate changes of incomes’
(op.cit., p. 346). In all the cases studied, the equilibrium distribution appears to be
asymptotic to a straight line. Nevertheless, the same author notes that there is a lack
of consideration ‘of models which do not lead to a Pareto distribution’ (op.cit., p. 347)
(italics in original). Moreover, in his model, there is no analysis of the relationship
between the distribution and growth.
The emergence of Kuznets’ (1955) seminal paper resuscitated ‘economic growth
and income distribution’ issues. His analysis shifted focus from national income aggre-
gate distribution among classes to the distribution of available household or individual
income. Kuznets posited that the Gini index would move at the pace of economic
development. It would increase during the early stages of industrialization and decrease
afterwards. Some authors (Paukert, 1973; Ahluwalia, 1976) allegedly found ‘substan-
tial confirmation of a statistically significant relationship’ between those variables
(Ahluwalia, 1976, p. 129). New measurements, however, call into question the validity
of these results (Deininger and Squire, 1996; Bourguignon and Morrisson, 1998).
1
See Felipe and McCombie (2012).
Considering the role given to human capital by some new growth theorists (Romer,
1986; Lucas, 1988; and Barro, 1990), a branch of the literature has since studied the
effect of inequality on growth, shifting focus yet again to inequality as the explanatory
variable (see, for example, Alesina and Rodrik, 1994; Persson and Tabellini, 1994; Li
and Zou, 1998; Forbes, 2000; Barro, 2000). Overall, however, these works are incon-
clusive because their answers differ concerning the main question: Does inequality
damage or benefit growth?
Over the last decade, others (Banerjee and Duflo, 2003; Lundberg and Squire,
2003; Voitchovsky, 2005) have found more complex relationships between our vari-
ables. According to García-Peñalosa and Turnovsky (2006, p. 26), ‘[a]n economy’s
growth rate and its income distribution are both endogenous outcomes of the eco-

nomic system. … They are therefore subject to common influences, both with respect
to structural changes as well as macroeconomic policies’. Nevertheless, to analyse
these relationships properly, it is imperative to re-establish the central role of factor
shares in explaining growth and distribution.
Following the general acknowledgement of the pro-profit path that functional distri-
bution of income has followed during recent decades (European Commission, 2009;
IMF, 2012; ILO, 2013; and OECD, 2012), the debate on the constancy of factor
shares has been rekindled in recent years. Some authors have found empirical evi-
dence to confirm Kaldor’s ‘stylized fact’ that factor shares are constant (Gollin, 2002).
Nevertheless, increasing research supports Solow’s rejection of that statement (Garrido
Ruiz, 2005; Carter, 2007; Lindemboim, 2008). Indeed, other authors (Atkinson,
2009) have called attention to the previously neglected topic of the evolution of the
functional—the so-called factorial or, in this paper, primary—distribution of income.
Recently, Piketty’s (2014) already well-known book has driven current debates on
increasing income going to capital. In short, this author explains rising inequality as
a consequence of the faster growth of wealth in comparison to output, which, in his
view, has led to the increase in the share of income from capital in national income.
This conclusion is obtained from two ‘fundamental laws of capitalism’, according to
Piketty. The first is that ‘the share of capital income in national income is equal to the
average rate of return of capital times the capital/income ratio’ (Piketty, 2014, p. 168).
The second is that ‘the higher the savings rate and the lower the growth rate, the higher
the capital/income ratio’ (op.cit., p. 55).
The former is simply ‘a pure accounting identity’. However, the latter allows Piketty
to claim that ‘in a quasi-stagnant society, wealth accumulated in the past will inevitably
acquire disproportionate importance’. Thus, ‘[t]he return to a structurally high capital/
income ratio in the twenty-first century, close to the levels observed in the eighteenth
and nineteenth centuries, can therefore be explained by the return to as low-growth
regime’ (op.cit., p. 166). Accordingly, Piketty demands ‘a global tax on capital’ (op.cit.,
p. 515) as the most effective policy tool to fight rising income inequality.
Several criticisms have been raised in response to Piketty’s analysis and proposal
(see, for example, Fullbrook and Morgan, 2014). Some of them (see Pålsson Syll,
2014) have focused on Piketty’s reliance on the ‘marginal productivity theory’, and
others (see Fullbrook, 2014) on Piketty’s ‘confusion’ in the use of the concept of
capital meaning wealth instead of productive capital. In our view, these shortcomings
prevent Piketty from understanding the relevance of the functional distribution of
income as the last determinant of both the growth path and the income distribution
pattern.
Thus, as explained in the introduction, no author has integrated the outcomes of
the different empirical analyses that, on the one hand, link the functional distribution
of income and growth rates and, on the other hand, link that distribution with the top
income shares and the Gini index. Therefore, to fill that gap, after reviewing the litera-
ture on primary distribution-growth and primary distribution-interpersonal inequality
relationships, this paper will integrate both in an extended explanatory schema.
3. Primary distribution, aggregate demand and growth: the

Bhaduri-Marglin Model
Classical economists only considered one way in which distribution affected growth:

the role of profit in financing investment. Thus, in that tradition, there was an implicit
positive relationship between pro-profit distribution and growth. However, the emer-
gence of Kaleckian/Keynesian thought introduced a new line of causality: the potential
positive effect of a real wage increase on growth through rising consumption (due to a
higher propensity to consume out of wages than out of profits), increasing productive
capacity utilization, and, ultimately, generating a higher profit rate.
That idea is the basis for the model constructed by Amit Bhaduri and Stephen
Marglin. Their seminal paper (Bhaduri and Marglin, 1990) argues for the indefinite
effect of a rise or fall in real wages on the level of output and employment. Their start-
ing point is the definition of a savings function that is totally dependent on profits. It is
assumed that a constant portion of profits is saved, but this is not true of wages. If the
function is expressed in terms of capacity utilization of the economy, then
S = s ( R / Y ) (Y / Y * ) Y * => S = shz; Y* = 1
where R = total profits, Y = national income, Y* = full capacity utilization income
(treated as constant in the short run), h = R/Y = profits share, and z = Y/Y* = capacity
utilization degree.
Bhaduri and Marglin assume that firms set a given profit margin on their marginal
and average costs: a positive relationship between that profit margin and the profit
share. They state that, at a given level of labour productivity, there is a distributional
conflict: profit margin and share against the real wage. The real wage has a negative
effect on investment via a lower profit margin/share but a positive effect on consump-
tion. To determine which effect is stronger, they define an investment function that is
positively dependent on profit share and capacity utilization:
I = I (h, z ) ;Y * = 1; I h > 0; I z > 0
where I = investment.
Equating savings and investment, Bhaduri and Marglin imply for the above
equations that
shz = I ( h, z )
with the following being the curve’s slope:
dz / dh = (I h
− sz ) / ( sh − I z ) ; I h = (dI / dh ) > 0
The slope can be positive or negative depending on the relative response of invest-
ment and savings to variations in both profit share and capacity utilization. Bhaduri and
Marglin take as a standard assumption that savings are more reactive than investment
to variations in capacity utilization. Thus, the final effect of a change in profit share on
capacity utilization and, therefore, on output depends on whether investment is more or
less responsive than savings to the positive effect that capital share in GDP has on both.
On the one hand, if the response of investment to a change in the profits share is
stronger than that of savings, then investment is the dominant component of aggregate
demand and the growth is profit-driven. In this ‘exhilarationist regime’, the positive
effect of a higher profit share on investment is more important than its effect on sav-
ings. Given the assumed higher propensity to save from profits than from wages, the

positive effect of capital share on investment is also higher than the negative effect of
real wage restraint on private consumption.
In an exhilarationist regime, the working class as a whole may obtain gains in the
total real wage bill via the increasing employment thereby created. This situation,
however, generates a conflict within the working class, i.e., between different groups
of workers, insofar as new jobs are created at the expense of the real wages of those
already employed. Moreover, this can also generate eventual problems for the capital-
ist class: an overaccumulation crisis may develop through the excessive investment
required to maintain aggregate demand relative to the higher productive capacity
created.
If, on the other hand, the response of investment to profitability is weaker, then con-
sumption leads demand and the growth is wage-driven. In this ‘stagnationist regime’,
a lower profit share and a higher wage share allow aggregate demand and capacity
utilization to grow as long as the positive effect on total consumption is greater than
the negative effect on capital formation.
In a wage-led pattern of growth, total profit may increase through higher sales that
compensate for lower profit margins, although an intra-capitalist class conflict may
emerge because different capitalist groups suffer differing losses on their profits. The
authors call this pattern ‘cooperative capitalism’. The cooperative relationship between
capital and labour reaches its limit, however, when the improvement in capital utiliza-
tion, resulting from the higher real wage, is insufficient to counterbalance the worsen-
ing profit margins. Thus, ‘profit-squeeze’ caused by income distribution in favour of
wages can hamper growth. This situation requires real wages to grow below productiv-
ity improvement to avoid an underaccumulation crisis.
In summary, in the short term and in a closed economy, a variation of factor shares
in favour of either profits or wages can impact growth either positively or negatively.
On the one hand, in profit-led regimes, the increased profit share promotes growth
through higher investment, but pro-labour distributional policies pose obstacles to
it. In wage-led regimes, the increased wage share promotes growth through higher
consumption, but pro-capital distributional policies generate stagnation or unstable
growth processes (Stockhammer and Onaran, 2012).
If the economy is open, the results of the model in a context of wage-led growth
may be altered. The larger the share of exports and imports in national income and
the greater the elasticities of both exports and imports vis-à-vis international price
competitiveness, the less relevant are the relationships described by the stagnationist
regime. The negative effect of a lower real wage on aggregate demand can be out-
weighed by the positive effect of lowered costs on external sales. This can cause a shift
from a wage-led to a profit-led wage regime. Nevertheless, the problem faced by any
economy following a policy of real wage restraint is the impossibility for all countries
to simultaneously achieve competitive gains.
That generates a context in which policies aimed at lowering labour costs are taken
in economies that are still wage-led. As we shall see in Section 5, this not only poses
obstacles to growth but also generates social instability. The link between those pro-
cesses is mediated by the effect that a change in factor shares has on the distribution of
household income. This last relationship will be analysed next.
4. Primary distribution, household incomes and inequality

As explained in the introduction, in recent years, a relevant line of research has been
developed on the evolution of the share of the richest population groups in various
countries’ distribution of household income (Atkinson, Piketty and Saez, 2011). Its
main finding is a U-shaped pattern in the evolution of top income shares during the
twentieth century, dropping in the first half, increasing during the second, and con-
centrating gains within the top percentile of disposable income for most countries
under study. Piketty (2014) has developed a general explanation for this trend based
on the faster growth of wealth in comparison to output. However, as explained in
Section 2, reliance on the marginal productivity theory and confusion on the concept
of capital exclude the particular role of the functional distribution of income from the
explanation.
The only systematic account of increasing top incomes is that of other authors who
have argued in favour of a central relationship between the primary and personal dis-
tributions to explain the evolution of top incomes. These authors have supported that
relationship with empirical evidence (Daudey and García-Peñalosa, 2007; Giovannoni,
2010; Adler and Schmid, 2012; Schlenker and Schmid, 2013; Wolff, 2015). For that
purpose, they have considered variables other than those used in the usual ‘empirical
work on cross-country differences in personal income inequality’ that for decades has
‘consisted of tests of the Kuznets hypothesis’ (Daudey and García-Peñalosa, 2007, p.
825).
According to Atkinson (2009, p. 8), today ‘people have multiple sources of income …
and there is considerable inequality within categories of income’. In fact, some cat-
egories of workers not only receive wage income but also acquire capital incomes2;
likewise, some of the capitalists and landlords receive not only proprietor income but
also payments for serving as CEOs or company directors. In addition, it is necessary
to consider the distribution of capital incomes within different families’ income shares
and the wage dispersion between low-paid and well-paid workers. This would diminish
the ‘profits/wages split’s … importance as a direct determinant of personal income dis-
tribution’ (Glyn, 2009, p. 102). Nevertheless, Glyn’s conclusion is that the ‘functional
distribution is still important in discussions of economic inequality’ (op.cit., p. 103).
As noted above, the empirical studies quoted find relevant relationships between
the primary distribution of income and overall inequality. Specifically, those studies
2
It was Luigi Pasinetti (1962) who first considered the implications of this fact for the theory of the
relationship between income distribution and economic growth. He concluded ‘the irrelevance of workers’
propensity to save’ (Pasinetti, 1962, p. 274). However, this allows him to assert that the relation ‘between
capitalists’ savings and capital accumulation … is valid independently’ (op.cit., p. 275) of any assumption
on workers’ savings.
determine that in any economy, a lower (higher) share of wages in national income
tends to generate a lower (higher) share of middle- and lower-income households in
the distribution of disposable income. The Gini coefficient of the personal income dis-
tribution is thus raised (lowered), in accordance with Leigh’s (2007, p. 628) finding of
a significant relationship between top income shares and the Gini index.
Conversely, a higher (lower) share of profits results in a higher (lower) share of the
richest households’ disposable incomes, thus raising (lowering) that coefficient. The
capital share, in fact, is linked to proprietor income, which now accounts for a higher
proportion in the top 1% and 10% of incomes than in the incomes of lower house-
hold percentiles and deciles. Consequently, an increasing profit share generates higher
income concentration in those top income shares. On the contrary, as labour’s share is

more equally distributed, its increase would generate a decrease in Gini index.
Overall, the extent to which redistribution of national income between wages and
profits affects the personal income distribution depends on the distribution of those
factors’ among households. As Adler and Schmid (2012, p. 10) state, if the income
structure were the same in all quintiles, a change in the primary distribution would not
alter the personal income distribution. If, however, households only received income
from one source (wages or profits), a change would severely modify the personal dis-
tribution. In the case where households or individuals receive incomes from both
sources, the magnitude of an altered primary distribution depends on the respective
concentration of capital or labour incomes among different household income strata.
Daudey and García-Peñalosa (2007, p. 814) assert that to ‘assess the contribution of
each of these variables to inequality’ it is necessary to have data, not only of the func-
tional distribution but also on the distribution of labour and capital endowments. This
set of data is rare, making it necessary to utilize proxies. However, it is possible to use
the distribution of the two income factors of capital and labour to determine the extent
of the effect that redistribution between them will have on overall inequality.
The starting point lies in the following assumptions: there are only two sources of
income (wages and profits); profits are completely distributed to shareholders; there is
no redistributive action by the state. Any household quantile’s share of total available
income is, therefore, the result of multiplying its share of labour and capital incomes
by the share of wages and profits in national income:
Hi = (Li
/ W ) ((W / Y )) + (C i
/ R) (R / Y )
where Hi= household i’s quintile share in total available income, Li = household i’s
quintile labour income, W = sum of wages, Y = national income, W/Y = wages share,
Ci = household i’s quintile capital income, R = sum of profits, and R/Y = profits share.
If
L1 = L2 = L3 = … = Ln ; C1 = C2 = C3 = … = Cn
then the Gini index = 0 and the functional distribution will have no effect on interper-
sonal distribution of income.
If
Li = Ci ≠ Ln = Cn
then the functional distribution will have no effect on the interpersonal distribution
of income, but wages and capital gains concentration will have an effect, making the
Gini index ≠ 0.
If
Li = 0 when Ci ≥ 0 and the opposite
then the functional distribution will completely determine the interpersonal distribu-
tion of income.
If

Li ≠ 0 and Ci ≠ 0
then the functional distribution will thus affect the interpersonal income distribu-
tion depending on the degree of concentration of labour and capital incomes within
households. If labour incomes represent a large (small) share of low- and medium-
income households, then the regressive effect of the primary redistribution in favour of
profits would be large (small); by definition, the Gini index would worsen (improve).
With these simple relationships as a reference, the Bhaduri-Marglin framework can be
extended to analyse potential relationships between growth and inequality.
5. Growth-inequality relationships in the Bhaduri-Marglin Model’s

regimes
As we will see in this section, either pro-capital or pro-labour policies can promote or
hamper growth at the expense of / due to inequality or due to distributional equality,
depending on an economy’s growth regime. Moreover, there are contexts of high growth
and increasing inequality that are both economically and socially stable. Equality could
also allow growth while enabling economic and social stability. In other contexts, how-
ever, egalitarianism can generate instability if distributive polices reduce growth rates.
Instability can also be generated by an increase in inequality that hampers growth.
In an exhilarationist regime, a national income redistribution in favour of prof-
its not only increases growth rates but also impacts poverty rates positively through
increased employment. The overall effect of that growth on inequality is indeterminate.
It depends on the degree of capital gains concentration in the top incomes. If that
degree is high, the Gini index will increase as an effect of the pro-profit distributional
policies. However, if total income rises for low-income households, social stability will
prevail, at least until an overaccumulation problem appears or productivity becomes
affected by the lack of incentive to develop labour-saving technology.
Conversely, if an exhilarationist regime experiences a national income redistribu-
tion in favour of wages, then profits and growth rates decrease. If capital incomes are
concentrated, the top income share declines and the Gini index falls due to higher real
wages, but the total earnings of low-income households will deteriorate because of ris-
ing unemployment. This eventuality would probably increase poverty. Although social
stability is assumed a priori, an economic crisis could ensue because of decreasing
investment and/or worsening international competitiveness.
In a stagnationist regime, pro-wage policies push growth. This reduces inequality
and poverty by increasing the absolute level of medium- and low-income households’
share of incomes. In spite of the falling profit share, the total revenue of the top income
share also rises. Both economic and social stability will prevail, particularly if higher
employment rates improve workers’ bargaining power, at least until a profit squeeze
harms profitability and investment.
Conversely, however, a stagnationist regime’s redistribution of national income in
favour of profit undermines growth, increases the top income share, decreases the
medium- and low-income shares (because of falling real wages) and increases unem-
ployment rates. All those factors raise the Gini index and, perhaps, the poverty rate.
Economic growth eventually confronts an underconsumption crisis; social instability
rises along with economic inequality.
In an exhilarationist regime, policies that foster income inequality still promote eco-

nomic growth. In a stagnationist regime, however, egalitarian policies promote growth.
In both cases, economic and social paths are stable. Conversely, egalitarian policies
in an exhilarationist regime affect growth negatively, whereas inegalitarian policies
undermine growth in a stagnationist regime.
Nevertheless, there are significant differences. In an exhilarationist regime, anti-
growth policies may not generate social instability, but anti-growth policies in a stag-
nationist regime may cause instability. In any event, inequality affects growth either
positively or negatively according to the regime. This observation would explain the
divergent findings of several empirical studies on the relationship between the distribu-
tion of income and growth.
All these potential relationships between growth and inequality mediated by the
evolution of factor shares can be summarized using a two-figure scheme. In the first
(Figure 1a), the effect of distributional policies at the macroeconomic level in different
Bhaduri-Marglin Model regimes is analysed by linking GDP growth to labour share
variation. In the second (Figure 1b), the effect of those policies on household inequal-
ity is analysed by also linking an inequality indicator, such as the Gini index, to labour
share variation. Several possibilities and combinations arise.
Economies situated in the upper- or lower-right areas of Figure 1a, which grow above
average, are those following the ‘appropriate’ policies of each of the growth regimes.
Either cooperative capitalism or classical / export-led growth patterns can be estab-
lished. On the contrary, if pro-labour policies are implemented in profit-led economies,
Figure 1a. Distributive Policies, Labour Share and Growth in Bhaduri-Marglin’s Regimes.

Source: Author’s own elaboration.
or pro-capital policies in wage-led economies, they will be situated in the left areas of that
figure, where growth rates are lower than average. A profit squeeze or overaccumulation
crisis can appear. If exhilarationist growth regimes prevail, a downward trend will be
drawn. In the case of a majority of stagnationist regimes, there will be an upward trend.
On the other hand, it is expected that economies will be situated in the downward
diagonal of Figure 1b, showing the positive (negative) impact of pro-labour (pro-capital)
policies on income distribution. There will be economies situated in the lower-left or
upper-right area of that figure only if capital incomes represent a large (small) share of
low- and medium- (high-) income households or if labour earnings are unequally distrib-
uted, respectively. In those cases, pro-capital policies will generate an improved house-
hold income distribution, whereas pro-labour policies will provoke worsened inequality.

In the usual case, however, if stagnationist regimes prevail and the labour share is
correlated negatively with inequality, the upward diagonal of the labour share-growth
relationship will form a combined cross figure with the downward diagonal of the
labour share-inequality relationship (Figure 2a). On the contrary, if exhilarationist
regimes prevail and the negative wage share-inequality relationship is maintained, the
downward diagonal of the labour share-growth relationship will run parallel to the
labour share-inequality relationship’s diagonal (Figure 2b).
Figure 1b. Distributive Policies, Labour Share and Households Incomes Inequality.

Figure 2a. Growth-Inequality Relationships in Stagnationist Regimes.


Figure 2b. Growth-Inequality Relationships in Exhilarationist Regimes.
In those typical cases, pro-labour policies taken in a stagnationist regime, shown in

the upper-right area of Figure 1a, will be accompanied by decreasing inequality, shown
in the upper-left area of Figure 1b. Likewise, pro-capital policies implemented in an
exhilarationist regime, shown in the lower-right area of Figure 1a, will come together
with increasing inequality, shown in the lower-right area of Figure 1b. In both cases,
economic and social stability will be ensured.
On the contrary, economies situated in either the upper-left or lower-left areas of
Figure 1a, which indicate that ‘inappropriate’ policies were implemented in each of
the regimes, will be socially stable only if they are also situated in the left areas of
Figure 1b, which indicate that those policies are at least reducing inequality. Otherwise,
social instability will probably arise together with the economic instability generated
by those policies.
In summary, different distributional policies can lead to higher or lower growth
rates. At the same time, the multiple engines of economic growth can lead to greater
or less social stability. In the next section, we analyse which of those relationships pre-
vailed in the period before the current economic crisis.
6. Empirical evidence: falling labour share, GDP growth and top incomes,
2000–2007
As already noted, the Bhaduri-Marglin Model has been applied to several national
economies. These include economies in Asia (China, India, Japan, Korea, Thailand,
Turkey), Europe (Austria, France, Germany, Italy, the Netherlands, the UK), North
America (Canada, the USA), South America (Argentina, Mexico) and also Australia
and South Africa. According to Stockhammer and Onaran (2012, p. 8), who review
these works, ‘most studies conclude that domestic demand is wage-led …. Thus demand
is profit-led only when the effect of distribution on net exports is high enough to offset
the effects on domestic demand, and this is likely only in small open economies’ (ital-
ics in original).
As also mentioned, there are other recent works that have tried to analyse the rela-
tionship between the functional and personal distribution of income. Daudey and
García-Peñalosa (2007) conducted such an analysis using a panel of observations
from 39 different countries; Giovannoni (2010) using a 26-country group; Adler and
Schmid (2012) using German micro data; Schlenker and Schmid (2013) using a panel
of 17 European Union countries during the 2005–2011 period; and Wolff (2015)
analysing the long-run (1947–2012) relationship between top income shares and the
profit share in the United States economy. All these works agree with Daudey and
García-Peñalosa’s (2007, p. 825) conclusion that ‘a larger labour share is associated
with lower inequality’.
In this section, we will study the links between both processes by analysing the
trends followed by labour share, growth and top income shares in a panel of 20 coun-
tries. The selection of variables and countries is based on the availability of homo-
geneous data. The Annual Macroeconomic Database of the European Commission
(AMECO) provides the widest coverage of homogeneous data on the functional

distribution of income at the international level. The same applies for the World Top
Incomes Database, which provides homogeneous data of top income shares—which,
as stated by Leigh (2007, p. 628), are significantly related with the Gini index—for a
number of countries around the world.
Both databases provide data for 19 common countries. Most of these countries
are European (Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands,
Norway, Portugal, Spain, Swede, Switzerland and the UK), but the group also includes
countries from Asia (Japan and Korea), North America (the USA and Canada) and
Oceania (Australia and New Zealand). AMECO does not provide data for China, but
given its relevance for recent growth in the world economy, it has also been included
based on data calculations for the functional distribution of income (Molero-Simarro,
2015), GDP growth, and top 10% income share (Molero-Simarro, 2013).
For the rest of the countries, AMECO’s ‘adjusted wage share’3 and the World Top
Incomes Database’s ‘top 10% income share’ (not including capital gains) series have
been used.This election makes it possible to focus on the direct relationship between total
labour share and both GDP growth and top incomes, avoiding the potential bias derived
from the recent evolution of both self-employment income and housing bubble gains.
At first sight, there appear to be quite strong relationships between the variables
chosen. Paradoxically, in the short run, the average share of wages on GDP seems
to behave countercyclically (Figure 3a). This is probably due to composition effects
during crisis periods when low value added and wage jobs are first destroyed and to
productivity gains going to profits during the growth periods, when wages usually grow
below GDP per capita. However, in the long run, the decrease in the labour share is
accompanied by a reduction in the overall GDP growth rate. This is consistent with
Onaran and Galanis’s (2012, p. 42) finding that ‘the global economy is wage led’.
On the other hand, a robust negative relationship between the wage share and the
average top 10% income share of the 20 countries under study is shown (Figure 3b).
From the 1960s to the 1980s, the rising labour share drove a decrease in top income
shares. Afterwards, the richest households started to recover through the fall in the wage
share of GDP. This is consistent with the conclusions of previous studies (Daudey and
3
As explained by Krämer (2010, p. 2), ‘[n]ational accounts provide the share of employees’ compen-
sation in total income, but do not identify separately the labour income of other categories of workers
(self-employed, employers, and family workers). The most common correction procedure is to augment
the employees’ compensation with compensation of other categories of workers by assuming that other
categories of workers earn the same average wage as employees’. This is what AMECO does by calculat-
ing the ‘adjusted wage share’ as [(Compensation of Employees / Employees) / (Gross Domestic Product /
Employment)], the same formulation proposed by Krämer (2010, p. 3).

Figure 3a. Average Labour Share and GDP Growth Rates (20 countries sample), 1960–2012.
Source: Author’s own calculations based on data from AMECO and author’s own data for China.
Figure 3b. Average Labour Share and Top 10% Income Share (20 countries sample), 1960–2012
Source: Author’s own calculations based on data from AMECO, World Top Incomes Database
García-Peñalosa, 2007; Giovannoni, 2010; Adler and Schmid, 2012; Schlenker and
Schmid, 2013; Wolff, 2015), which point to the policies that reduced the labour share
to explain higher inequality during recent decades. The average top income reached its
peak in 2012 when the crisis had already deteriorated the labour share, and once the
composition positive effect on its share finished.
More detailed results for the 2000–2007 period are presented in Figures 4a and 4b,
which are similar to Figures 1a and 1b introduced in the previous section. Some trends
can be highlighted:
First, if China’s (where an exhilarationist regime prevails) data are removed from the
calculation, an upward trend line is drawn in Figure 4a that relates adjusted labour share
variation rates with GDP average growth rates. As previously stated, this points to the
predominance of wage-led growth regimes. This is consistent with Stockhammer and
Onaran’s (2012) finding, quoted earlier, of that predominance in those economies in
which the Bhaduri-Marglin Model has been applied. Contrary to the nature of their
regimes, however, a majority of countries are situated in the lower area of that figure. This
indicates a general trend of a falling labour share during the first years of the twenty-first
century, which has undermined growth. Only in China has that trend pushed growth
rates up substantially. In other countries, it has maintained growth rates below average.
Second, in Figure 4b, a downward trend line is drawn, as expected. The falling labour
share has driven an increase in top income shares for the majority of the countries under
study. In some of these countries (mainly Denmark, Ireland and Italy), the top 10%
income share still rose despite increasing wage share. As stated in the previous sections,
this is due to the enlargement of labour earnings dispersion4. In other cases (mainly
Finland and Norway), the top 10% income share decreased despite the falling labour
share. As also stated, this would be due to a higher than usual share of capital incomes
in low- and/or medium-income households’ earnings5. However, despite the progression

Figure 4a. Labour Share and GDP Growth Rates in a Sample of 20 Countries, 2000–2007.
Figure 4b. Labour Share and Top 10% Income Share in a Sample of 20 Countries, 2000–2007.
Source: Author’s own calculations based on data from AMECO, World Top Incomes Database
4
According to OECD’s Employment and Labour Market Statistics data, in those countries where the top
incomes increased despite the rising labour share, the Decile 9/Decile 1 ratio increased between 2000 and
2007. In Denmark, it rose from 2.50 to 2.69, and in Ireland, it rose from 3.27 to 3.78. In Italy it increased
from 2.22 in 2000 to 2.36 in 2006.
5
Unfortunately, there are no available comparable data on capital income shares in household quantiles
of total earnings.
of the indicators in those countries, there is a general trend showing that the greater the
decrease in the labour share, the larger the increase in the top income share.
If the sample is divided between those economies labelled profit-led and those labelled
wage-led in Stockhammer and Onaran’s (2012, pp. 21–22) reviewed works, the stated
trends are also confirmed. In the first case, profit-led economies (Australia, Canada
and China) present a strong positive relationship between the falling labour share and
GDP growth rates (Figure 5a). This also seems to be true for the relationship between
the share of wages on national income and top 10% income share progression in those
countries (Figure 5b). It is China’s economy that seems to drive the link between those
last variables. However, Australia and Canada contribute to the trend stated, as well.
In the case of wage-led economies, a positive relationship is shown between the

labour share and GDP growth (Figure 6a). The largest falling labour shares (in Japan
Figure 5a. Labour Share and GDP Growth Rates in Profit-Led Economies, 2000–2007.
Figure 5b. Labour Share and Top 10% Income Share in Profit-Led Economies, 2000–2007.
Source: Author’s own calculations based on data from AMECO,World Top Incomes Database
and Germany) have been accompanied by some of the lowest average growth rates.
The trend is as strong in the case of the relationship between the share of wages on
GDP and the top 10% income share progression (Figure 6b), although the inclusion
of Korea flattens the trend line. Even taking into account this exception, growth-ine-
quality relationships in wage-led economies seem to have been negatively affected by
pro-capital policies.
Overall, if the general trend lines in the evolution of the labour share, growth rates and
the top income share are put together, a picture similar to that in Figure 2a emerges. As
explained in the previous section, this figure shows the generalized negative effect that
a falling labour share has on both growth and inequality when stagnationist regimes
prevail. Consequently, the period before the crisis can be characterized as a phase of

low growth rates and increasingly higher inequality due to pro-capital policies imple-
mented in a context in which most economies were driven by wages.
Figure 6a. Labour Share and GDP Growth Rates in Wage-Led Economies, 2000–2007.
Source: Author’s own calculations based on data from AMECO.
Figure 6b. Labour Share and Top 10% Income Share in Wage-Led Economies, 2000–2007.
Source: Author’s own calculations based on data from AMECO and World Top Incomes.
The main implications of these trends are presented in the concluding section of the
paper. However, in the next section, the cases of China and the Eurozone are analysed
further to understand the implications of distributional policies in different growth
regimes.
7. Pro-profit policies in exhilarationist versus stagnationist regimes: the

cases of China and the Eurozone
As stated, a particular distributional policy can promote or hamper growth depend-
ing on whether a profit-led or wage-led regime prevails. If the appropriate policies are
implemented in profit-led regimes, social stability can be ensured despite rising income

inequality. However, if pro-profit policies are also undertaken in wage-led regimes, a
risk of both economic and social instability may emerge. In this section, two cases will
be presented that shed light on the mechanisms behind those processes: China and
the Eurozone. During the last decades in both economies, policies aimed at increasing
profitability have been adopted. Such policies helped China to become the second-
largest economy in the world. Nevertheless, similar policies are behind the onset of the
current crisis in the Eurozone.
In China, intense rural-urban migration, together with the disappearance of the
urban employment protection system, curbed wage improvements. Real wages in the
secondary and tertiary sectors increased by an annual average of 5.5% in compari-
son to a 14.5% increase of productivity between 1991 and 20076. Consequently, the
labour share fell almost incessantly until reaching a level of just 42.5% of GDP7. This,
together with the devaluation of the renminbi, allowed China to reduce the nominal
unit labour costs, obtaining very relevant external competitiveness gains.
Thus, according to UNCTAD data, China’s share of world exports rose from 0.8%
in 1978 to 8.7% in 2007. Decreasing private consumption on GDP due to the falling
Figure 7. Growth-Inequality Relationships, 2000–2007.

6
Own calculations based on National Bureau of Statistics of China’s data.
7
labour share caused external sales to become the primary source of final demand.
In addition, growing profitability due to lower labour costs and expanded exports
generated huge surpluses for businesses. As the main source of large internal savings
(He and Cao, 2007), the reinvestment of a large proportion of those profits explains
the increasing investment rates of the Chinese economy, which accounted for 39.5% of
GDP, on average, during the 1992–2007 period. Thus, the Chinese economy’s growth
path has become dependent on both exports and investment (Zhu and Kotz, 2010)
and, consequently, is profit-driven (Molero-Simarro, 2015). This is the way China
became the world’s second-largest exporter and the second-largest economy in 2007.
However, the path followed by the functional distribution generated the conditions for
the worsening of the personal distribution pattern.

China’s rising inequality has usually been explained as a result of the enlargement
of the urban-rural income gap. Nevertheless, ‘[i]n urban China … income inequality
among all residents also increased rapidly, nearly doubling within about a decade’
(Wang, 2008, p. 6). This increase is mainly explained by the progress of factor shares
(Molero-Simarro, 2015). Whereas the falling wage share reduced medium- and low-
income urban families’ shares of available income, the rising profit share increased the
richest 10% of urban families’ share from 16.5% in 1985 to 25.5% in 20078. Thus,
average income ratio of the top 10% to the bottom 10% of income shares increased
from 2.9 in 1985 to 8.7 in 2007, substantially contributing to the sharp increase in the
Gini index of China from 0.310 in 1981 to 0.484 in 2007 (Molero-Simarro, 2013).
Nevertheless, social stability has been ensured. As explained above, in an exhilaration-
ist regime, such as that in China, aggregate distributional policies in favour of profits not
only support growth rates but also allow poverty rates to be reduced through increased
employment. This is what occurred in China. Despite rising inequality, if total income
rises for low- and medium-income households, social stability will prevail, at least until
overaccumulation problems appear or external markets collapse. In that case, pro-
wage distributional policies to reorient growth towards internal markets are required.
Nevertheless, if this measure is insufficient to move the growth regime from a profit-led
to a wage-led pattern, those distributional policies could lower profitability and absolute
profit levels as well as investment and growth rates. This appears to be the dilemma fac-
ing the Chinese economy after the outbreak of the latest global economic crisis.
In contrast with the case of China, the adoption of pro-profit policies in most Western
economies in recent decades, which according to estimations are mainly wage-led, has
posed obstacles to growth. The concentration of capital gains in upper family-income
quintiles provoked an increase in the top income share, increasing the Gini index (for the
case of the USA, see Wolff, 2015). Thus, private consumption declined because of reduced
wage share. That decline was provisionally counterweighted through the expansion of
mortgage and consumption credit enabled by financial market deregulation. Nevertheless,
this loosened policy created asset bubbles, which floated growth from 2001 to 2007, but
culminated in the 2008 financial meltdown and ensuing crises of social legitimacy.
In the case of the European Union, these problems have been enhanced by the particu-
lar shape of the European Monetary Union. On the one hand, due to the adoption of the
euro as a single currency, member states were deprived of the ability to devalue currency
in response to external competitiveness problems. Thus, the response of the peripheral
economies of the Euro area (including, among others, Greece, Ireland, Portugal and

8
Spain) has been the implementation of labour reforms aimed at wage restraint. Far from
allowing competitiveness gains, this strategy has led to the maintenance of external trade
deficits in these economies. On the other hand, some of the core economies, especially
Germany, have increased their share of world exports due to their improved productive
and trade specialization in industries with high added value. However, the approval of
their own labour-flexibility policies during the period before the crisis resulted in lower
rates of growth potential, which was due to a negative net effect on demand.
According to data from AMECO, between 1999 and 2007, the adjusted wage
share at market prices in the Eurozone declined, on average, from 56.7% to 54.2%
of GDP. Estimates have found that the Euro area is wage-led (Stockhammer, Onaran
and Ederer, 2009); thus, that reduction of the wage share limited both growth and

potential unemployment reduction. In the core economies, the enhancement of pro-
ductive and trade specialization allowed them to achieve some productivity improve-
ments. However, given the greater relative importance of domestic demand compared
with external demand, weakening private consumption caused lower-than-potential
growth. In the peripheral economies, the relative expansion of public expenditure
in some countries and real estate bubbles in others enabled significant job creation.
Nevertheless, productivity barely improved.
On the other hand, the increase in the capital share contributed to the deterioration
of the concentration of household income in most European countries, both before and
after the crisis (Schlenker and Schmid, 2013). According to Eurostat data, the average
Gini index of inequality in the Euro area worsened slightly (from 29.3 to 30 points
between 2005 and 2007 [only data available], compared with the stable 30.6 level in
the EU-27). Moreover, the average rate of people at risk of poverty or social exclusion
(AROPE) also increased slightly (from 21.5% to 21.7% between 2005 and 2007 [only
data available], compared with the reduction from 25.7% to 24.4% between those same
years in the EU-27). However, despite the limits to further growth set by the wage share
reduction, partial job creation during the period of expansion ensured social stability.
Since the bubble burst, the external debt problems of the peripheral economies have
led to an expansion of labour market reform measures in recent years. These measures
include the reduction of minimum wages and the creation of sub-minimum wages; per-
mission for opting out of collective bargaining agreements at the firm level; enlargement
of the causes for objective (justified) dismissals; retrenchment of unemployment benefits;
cuts in public sector employees’ earnings, etc.9 As a result, earnings have deteriorated sub-
stantially, even in nominal terms, and the wage share has suffered even greater declines.
In several of the core economies, such wage share has increased since 2010, generating a
surprising divergence from that in the peripheral economies. For example, in Germany,
the labour share increased from 53.7% to 56.8% of GDP between 2007 and 2014, but
in the Spanish economy, that share fell from 56.0% to 54.5% during the same period.
Although the trade deficits of the peripheral economies have declined, the collapse of pri-
vate consumption has deepened the economic downturn and increased job losses.
This, coupled with the sharp increase in income inequality promoted by the increase
in the capital share (Schlenker and Schmid, 2013), has generated a further worsening
of living conditions as measured by the AROPE rates in Greece (from 28.3% to 35.7%
between 2007 and 2013), Ireland (from 23.1% to 29.5%), Portugal (from 25.0% to
9
Information on the content of the labour reforms approved are obtained from the European
Commission’s database LABREF.
27.5%) and Spain (from 23.3% to 27.3%), compared to the Eurozone average (from
21.8% to 23.0%) and especially to the EU-27 (from 24.4% to 24.5%). All this has
generated intense social instability in those countries.
Following the results of the analysis presented in this paper, only a shift in economic
policy measures towards a wage share increase would reduce income inequality while
promoting higher rates of growth to substantially reduce unemployment rates and
ensure social stability.
8. Conclusions
To date, analyses have dealt with the causes of the falling wage share and of the increas-

ing top incomes. Although some authors have linked both processes empirically, a
comprehensive theoretical framework to explain their relationship in depth has been
lacking. The present paper attempts to address this gap by integrating those analyses
into a single theoretical scheme. Its main conclusion is that complex economic and
social relations operate between growth and inequality; each affects the other simul-
taneously in different ways. In particular, the analysis focuses on the effect of either
pro-wage or pro-profit distributional policies on both economic growth and inequality
in different Bhaduri-Marglin Model regimes. Appropriate policies can improve growth
and income distribution at once, whereas inappropriate ones can worsen inequality at
the same time that they reduce growth below potential.
In an exhilarationist regime, growth sustained by profit share generates a higher top
income share. Weakening private consumption requires improved international com-
petitiveness to avert an overproduction crisis. If that improvement is not achieved, or if
external markets collapse, pro-wage distributional policies to reorient growth towards
internal markets require reduced exposure to international competition. Nevertheless,
if this measure is insufficient to move the growth regime from a profit-led to a wage-led
pattern, those distributional policies could lower profitability and absolute profit levels
as well as investment and growth rates. Nevertheless, in the context of an increasing
labour share, top incomes and, ultimately, the Gini index will decrease.
In a stagnationist regime, higher growth rates pushed by a higher wage share are linked
to a lower top income share and a decreasing Gini index. The upward pressure of falling
unemployment rates on real wages leads capitalists to increase capitalization, thereby
spurring technological change. However, if this move does not succeed in increasing
productivity above real wage growth, a subaccumulation crisis could erupt. Government
response to this crisis, by pro-profit distributional policies, necessarily includes external
openness. Still, if openness is insufficient to move a wage-led to a profit-led growth
regime, the economy will grow below potential, top incomes will increase from larger
profits, and worsening inequality could potentially trigger an economic and social crisis.
Moreover, according to our results, it is the rising profit share that explains
the increasing concentration of income and wealth, not the other way around, as
Piketty (2014) suggests10. Indeed, in only a few countries did the enlarged share of
income from capital in national income lead to higher growth rates. In most of them,
10
As explained above, Piketty explains rising inequality as a consequence of the faster growth of wealth
in comparison to output, which, in his view, has led to the increase in the share of income from capital in
national income. In our view, the relationship is the other way around: the increase in the share of income
from capital has led to the faster growth of wealth in comparison to output due to capital gains concentra-
tion in top wealth shares.
the mounting capital share caused economies to grow below potential, contributing to
the slower growth of output in comparison to wealth, as highlighted by Piketty.
If a growth path is to be resumed in prevailing wage-led economies, the Bhaduri-
Marglin Model holds that pro-labour distributional policies are needed to reduce house-
holds’ financial leverage for private consumption. In the short run, these policies will
undermine profitability, but increased capacity utilization will improve total profits and
enable a response to the social crisis by reducing income inequality. Nevertheless, this
effective challenge to the top incomes will create resistance to those measures.
These conclusions notwithstanding, two assumptions still hamper the analysis. First,
only two sources of family income exist—wages and capital gains—and second, business
profits are entirely distributed. That said, if those assumptions are discarded the analy-

sis can still address issues such as the extent to which property rent distribution affects
inequality or the influence of policies that expand distributed capital earnings.
Other limitations of the scheme relate to the Bhaduri-Marglin conception of interna-
tional competitiveness as determined solely by real wages. This paper does not dispute
that conception, although this way of explaining competitiveness does limit the under-
standing of the operation of the global economy.
Finally, this paper does not consider the influence of political variables on social stabil-
ity issues. In this last respect, however, the proposed analytical scheme does suggest an
approach to understanding current economic and social processes.
Supplementary material
Supplementary material may be found online at the OUP Journals website.
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Cambridge Journal of Economics Advance Access published June 23, 2016

Cambridge Journal of Economics 2016, 1 of 24

Growth and inequality revisited: the role

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This paper presents an innovative interpretative scheme of the relationship between

Key words: Functional distribution of income, Factor shares, Aggregate demand,

Manuscript received 25 February 2013; final version received 18 December 2015.

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3. Primary distribution, aggregate demand and growth: the

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I = I (h, z ) ;Y * = 1; I h > 0; I z > 0

with the following being the curve’s slope:

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4. Primary distribution, household incomes and inequality

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Li = 0 when Ci ≥ 0 and the opposite

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5. Growth-inequality relationships in the Bhaduri-Marglin Model’s

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Figure 1a. Distributive Policies, Labour Share and Growth in Bhaduri-Marglin’s Regimes.

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Figure 1b. Distributive Policies, Labour Share and Households Incomes Inequality.

Figure 2a. Growth-Inequality Relationships in Stagnationist Regimes.

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In those typical cases, pro-labour policies taken in a stagnationist regime, shown in

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7. Pro-profit policies in exhilarationist versus stagnationist regimes: the

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Figure 7. Growth-Inequality Relationships, 2000–2007.

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Own calculations based on National Bureau of Statistics of China’s data.

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