Is Canadaâ€™s Economy Wage-Led?
The parenthetical reference to Canada in my last post prompted several good comments. This post attempts to summarize and address them.
Dr. Stockhammer has co-authored a paper with estimates for Canada, but he would be the first to note that they are mechanical and not necessarily relevant to policy. He finds that Canadaâ€™s domestic economy is wage-led, with a higher wage share increasing consumption by more than a lower profit share might reduce investment.
Even if these estimates are not statistically significant, they are consistent with other domestic economies. But the key question is whether a negative relationship between wages and net exports makes the overall economy profit-led, as Stockhammer found for Austria.
Canada is neither as small nor as open. Gross exports as a share of GDP are now around 30% for Canada versus 50% for Austria. And as a clever student once pointed out in the PEF essay contest, such gross figures significantly overstate the importance of exports to GDP.
Wages have essentially no effect on the â€œcompetitivenessâ€ of Canadaâ€™s mineral exports. Furthermore, while Austria has the same currency as its main trading partners, Canadaâ€™s flexible exchange rate should mitigate relative changes in cost competitiveness.
However, the relevant variable is not exports, but net exports: exports minus imports. There is no doubt that imports would comprise an appreciable fraction of the additional consumption from higher wages and/or income redistribution. Even if exports remained unchanged, higher imports would mean lower net exports.
On the other hand, imported capital goods would account for much of any additional investment arising from a higher profit share. Without further empirical work, I am not sure we can conclude more than that Canada is less wage-led than the whole Eurozone and less profit-led than Austria.
To me, even this ambiguity has an important policy implication. In large, relatively-closed economies (the Eurozone and United States), it would probably be sufficient to raise wages and redistribute income, allowing higher aggregate demand to then boost business investment.
These same pro-labour policies would be desirable in Canada, but given import leakages, the additional domestic demand may well be insufficient to spur investment. Therefore, Canadian progressives also need more direct policies to spur investment, such as public capital spending (whether on infrastructure or through Crown corporations) and targeted incentives for private capital spending.