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Wage-led growth in the EU15 member-states: the effects of income distribution on growth, investment, trade balance and inflation

Ozlem Onaran, Thomas Obst, (2016), “Wage-led growth in the EU15 member-states: the effects of income distribution on growth, investment, trade balance and inflation”, Camb. J. Econ. 2016

This paper estimates a multi-country demand-led growth model for the EU15. A decrease in the share of wages in national income in isolation leads to lower growth in Finland, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom, whereas it stimulates growth in Austria, Belgium, Denmark and Ireland. However, a simultaneous decline in the wage share leads to an overall decline in EU15 GDP; hence, the EU15 as a whole is a wage-led economy. Furthermore, Austria and Ireland also experience a decline in growth when they decrease their wage share along with their trading partners. The results indicate that the decline in the wage share had significant negative effects on growth in the EU15 and supports the case for wage coordination. We present different wage-led recovery scenarios and the effects on prices, investment and net exports.

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