Technology, demand and distribution: A cumulative growth model with an application to the Dutch productivity growth slowdown

Abstract

This paper argues that the case for real wage growth restraint, and the consequent restoration of profitability, which the mainstream consensus regards as a necessary condition for sustained output and productivity growth, is based on weak foundations, because it neglects the negative impact of wage moderation on productivity growth. Using a general Keynesian growth model, which integrates a (wage-led or profit-led) demand regime and a productivity regime (incorporating the productivity-growth enhancing effects of higher demand and higher real wages), the conditions are identified under which real wage restraint fails to raise output and productivity growth. The model is applied empirically to the Netherlands (1960-2000). © 2006 Oxford University Press.