A Structuralist Analysis of Income Distribution and its Influence on the Macroeconomy

Abstract

This study undertakes a comprehensive structuralist analysis of income distri- bution and its macroeconomic implications, framed through three distinct but interrelated essays. These three essays aim to generate novel, theoretical modelling contributions to macroeconomic literature, prior to testing these contributions empirically for 7 countries. The first essay investigates the role of income distribution in maximising real GDP and evaluating cycles in the labour share around some GDP-optimising value, proposing a novel, parsimonious single-equation model to estimate the GDP-optimal labour share without reliance on Cobb-Douglas production functions. Employing Nonlinear Least Squares (NLS) and Dynamic Ordinary Least Squares (DOLS) techniques, the essay demonstrates that the relation- ship between the labour share and output is non-linear and time-dependent, with substantial variations across the seven countries analysed. The second essay explores the dynamic interplay between output, household debt, and the labour share (using the abovementioned novel specification to identify labour share cycles suggested in the first essay) positing that deviations between the actual and GDP-maximising labour share influence both business and financial cycles. Generating a two-equation structuralist framework, the study finds (through employment of a Structural Vector Autoregression - SVAR - approach) that income distribution shocks have asymmetric effects on debt accumulation and output, with wage-led economies in the sample under analysis (Australia, France, Germany, Italy, South Africa, the United Kingdom and the United States of America) exhibiting larger increases in household debt volatility and accummulation, than profit-led economies. The final essay extends the structuralist model found in Flaschel and Krolzig (2003) to an open macroeconomy, integrating wage and price Phillips Curves, monetary policy, and exchange rate dynamics. Employing a large SVAR approach, prior to conducting a stability analysis and utilising a novel, income distribution-sensitive monetary policy rule, the study establishes that shifts in income distribution can exacerbate macroeconomic stability. The findings suggest that structuralist-informed monetary policy frameworks can serve as effective tools for stabilising economies exposed to income distribution shocks. The study concludes by highlighting the policy implications of the findings, advocating for income distribution-sensitive approaches to macroeconomic management.