Growth is wage-led in the long run

Abstract The literature on the empirical linkages between economic growth (or other measures of macroeconomic performance) and the functional distribution of income is copious on the short run. The sustained and simultaneous decline in average rates of real GDP growth and the labor share of income in the USA in recent decades has led to renewed interest in the long run, in light of the hypothesis of inequality-induced secular stagnation. This paper employs a vector error correction model with time-varying parameters and stochastic volatility to estimate the long-run interaction between real GDP growth, labor share, and the unemployment rate. Our key result indicates that a lower labor share is associated with a decline in the growth rate: economic growth is wage-led in the long run.