Wage-led vs. profit-led growth: a comprehensive empirical analysis

This study investigates the impact of various economic factors in determining the relationship between functional income distribution and economic growth. Inspired by the seminal paper of Bhaduri and Marglin (1990), we base our analysis on a demand-driven distribution and growth model for an open economy that allows for either profit-led or wage-led growth. To this end, we use a cross-country panel dataset consisting of 41 countries from 1961 to 2011. In the first step of the empirical analysis, we first estimate whether growth regime is wage-led or profit-led in each country. Next, in the second step, using probit and meta-regression approaches with cross-country data, we analyse the effects of various macroeconomic variables on the nature of economic growth. Our results strongly reflect that a higher level of trade openness is associated with a lower probability of being wage-led. Moreover, we find evidence that lower wage inequality would make an economy more wage-led and that countries with a greater private credit-to-GDP ratio are more likely to be profit-led