Capitalists, Workers and Managers: Wage Inequality and Effective Demand

We present a simple three-class model in the Kaleckian tradition to investigate the implications of a dominant managerial class class for the dynamics of demand and distribution. Managers are hired by capitalists to supervise workers, but supervision results in surplus extraction and wage inequality. The adjustment of capacity utilization to accommodate goods market disequilibrium produces two distinct regimes with respect to the responsiveness of investment demand to profitability: a low investment–response regime, where effective demand is both wage–led and inequality–led; and a high investment–response regime, where demand is profit–led. In accordance with recent empirical evidence for the US, we then introduce distributive dynamics that hinge on inequality squeezing workers’ wage growth. We find that the low investment–responsiveness regime produces a stable demand–distribution equilibrium only if the wage squeeze effect is relatively small. On the other hand, an equilibrium in the high investment–response regime is saddle–path stable. The main distributional implication of the wage squeeze produced by inequality is that the effect of redistribution toward workers in both the low-investment response regime and and the high investment response regime leads to declining inequality and capacity utilization. Hence, in both regimes, the inequality–led character of the equilibrium overcomes the stagnationist or exhilarationist features of effective demand. These findings imply that distributive dynamics lead to a stronger basis for cohesion in the interests of managers and capitalists compared to workers and managers.