Essays on income distribution, cycles and economic growth

This thesis consists of three chapters on mostly unrelated issues. The leitmotif linking them is the interplay between income distribution and real activity. The income distribution considered in each essay is either interpersonal, functional, or both. Chapter 1 surveys the theoretical and empirical literature on the impact of interpersonal income distribution on economic growth. The first part analyzes the different transmission channels proposed in the theoretical literature. The second part examines the empirical literature, using statistical tools to identify the main factors influencing the reported results. Although the empirical evidence, partly reflecting its theoretical counterpart, is characterized by heterogeneous results, it is possible to identify the main elements driving the differences in estimates. Among these, a significant role is played by the cross-section/panel nature of the dataset, the type of estimator used, the country’s level of development, and the length of the growth spells under analysis. Chapter 2 proposes a Kaleckian theoretical model on the interaction between functional dis- tribution, personal distribution and economic activity. The paper presents the endogeneity of the demand regime and the interaction between personal and functional income distribution as two intrinsically linked issues. By assuming that saving is a function of personal rather than functional income distribution, an increase in the labor share effectively boosts consumption and aggregate demand, not per se, but only as long as it reduces personal inequality. As the labor share increases, both the demand regime type – the sign of the slope of the demand schedule - and its strength- the size of the slope of the demand schedule - can endogenously change. Concerning the former, there can be a threshold value for the wage share beyond which there is a shift from wage-led to profit-led demand. Unlike most Kaleckian models, the analysis shows that profit inequality is as important as wage inequality in determining the demand regime type and its strength. The last chapter focuses on the interaction between functional income distribution and the business cycle. The paper first provides a comprehensive literature review of the theories explaining the cyclical interaction between factor shares and economic activity. Secondly, it assesses if empirical evidence supports those theories, overcoming the strong criticalities present in the current empirical literature. To this end, a Bayesian VAR identified with sign restrictions is set up. The results suggest that cyclical fluctuations in the labor share are mainly driven by the pro-cyclicality of labor productivity - consistent with overhead costs and risk distribution theories - and by the Phillips Curve effect upheld by Goodwin. The model does not support Goodwin’s expansive effect of a capital share rise. In contrast, there is partial evidence favoring the biased technical change theory.