Labor Market Institutions, Endogenous Technical Change and Inequality: Demand-Side Secular Stagnation

Several OECD countries have recently experienced a simultaneous rise in income and wealth inequality and a decline in labor productivity growth. We provide an investigation of these stylized facts that focuses on the weakening of labor market institutions. For this purpose, we develop a two-class, demand-led model of growth and the distribution of income and wealth with endogenous technical change and explicit wage bargaining between workers and capitalists. We derive the conditions under which a worsening of labor market institutions that tilts the distribution of income and wealth in favor of the capitalist class lowers the equilibrium accumulation rate, the growth rate of labor productivity and employment.