ABSTRACT
While mainstream explanations point out technological changes as the main determinant of income inequality and admit that globalization has had negative effects on the wage share in advanced economies, the proponents of wage-led growth argue that the declining share of wage income and the increasing share of capital income has been the major cause of stagnation in the global economy. In advancing their proposition, proponents of wage-led policy rely on the Kaldor-Verdoorn Law in Kaldor (1957), which claims that there is a positive relation between the growth rates of GDP and the growth rate of labor productivity. It suggests that demand-led growth will have an impact on the supply components of growth. McCombie (2002: 106) reports that a one percentage point addition to the growth rate of output will generate a 0.3 to 0.6 percentage point increase (the Verdoorn coefficient) in the growth rate of labor productivity. It is consistent with the estimates by Storm and Naastepad (2009) and Hein and Tarassow (2010) which find a similar range around 0.30 for European countries (1960–2007 data) but a lower range for the UK and the United States between 0.1 and 0.25. The purpose of this paper is to investigate the causality between aggregate demand and labor productivity and examine the implication of the Kaldor-Verdoorn Law in East Asia using three East Asian Countries’ (China, Japan and Korea) data set. We find that the Kaldor-Verdoorn law is partly accepted from the data set of China and Korea and also the causality of real wages on labor productivity growth from the dataset of China and Korea not from the data set of Japan.
