Profit and Demand: A Cross-Country Analysis of Functional Income Distribution and Its Macroeconomic Effects

Heiden, Celina ; Sørensen, Jonas Buskov Svanberg

4. term

Economics, Master

2025

2025-06-02

107 pages

This thesis examines how changes in functional income distribution specifically, shifts in the profit share affect aggregate demand across ten advanced economies. Rooted in post-Kaleckian macroeconomic theory, the analysis explores whether rising profit shares stimulate or dampen demand, and whether this relationship varies across components such as private consumption, private investment, and net exports. The theoretical distinction between wage-led and profit-led regimes serves as the guiding framework, wherein demand responses depend on the relative strength of consumption versus investment and export channels. The empirical analysis uses quarterly data covering the periods 1995–2006 and 2010–2019, split to capture potential structural shifts following the global financial crisis. A local projection framework is applied to estimate the dynamic response of each demand component to a one percentage point increase in the profit share. The macroeconomic variables are processed to account for seasonal variation and medium-run cycles, ensuring that the estimated responses reflect cyclical dynamics rather than long-term trends or seasonal noise. Models are estimated separately for each country and time period to capture structural differences and allow for meaningful temporal comparisons. The results reveal clear cross-country variation and a mixture of demand regimes. In most cases, higher profit shares reduce private consumption, reflecting the lower marginal propensity to consume from capital income. Private investment responses are more variable with some countries exhibiting stronger profit-led investment dynamics, particularly in the post-crisis period, while others show muted or slight negative effects. Net exports play a modest role overall, although small open economies exhibit some improvements in trade balances following distributional shifts. Regime classification based on aggregate demand effects shows that some countries are consistently wage-led or profit-led, while others transition or fall into ambiguous territory. These findings underscore the importance of country-specific institutional structures such as labor market institutions, financial systems, and openness in shaping macroeconomic outcomes. The study contributes to the literature on functional income distribution by offering a comparative and time-sensitive assessment of how distributional changes influence demand formation. It also provides relevant insights for macroeconomic policy, suggesting that growth strategies should be tailored to the structural features of each economy rather than relying on uniform prescriptions.

This thesis examines how changes in functional income distribution specifically, shifts in the profit share affect aggregate demand across ten advanced economies. Rooted in post-Kaleckian macroeconomic theory, the analysis explores whether rising profit shares stimulate or dampen demand, and whether this relationship varies across components such as private consumption, private investment, and net exports. The theoretical distinction between wage-led and profit-led regimes serves as the guiding framework, wherein demand responses depend on the relative strength of consumption versus investment and export channels. The empirical analysis uses quarterly data covering the periods 1995–2006 and 2010–2019, split to capture potential structural shifts following the global financial crisis. A local projection framework is applied to estimate the dynamic response of each demand component to a one percentage point increase in the profit share. The macroeconomic variables are processed to account for seasonal variation and medium-run cycles, ensuring that the estimated responses reflect cyclical dynamics rather than long-term trends or seasonal noise. Models are estimated separately for each country and time period to capture structural differences and allow for meaningful temporal comparisons. The results reveal clear cross-country variation and a mixture of demand regimes. In most cases, higher profit shares reduce private consumption, reflecting the lower marginal propensity to consume from capital income. Private investment responses are more variable with some countries exhibiting stronger profit-led investment dynamics, particularly in the post-crisis period, while others show muted or slight negative effects. Net exports play a modest role overall, although small open economies exhibit some improvements in trade balances following distributional shifts. Regime classification based on aggregate demand effects shows that some countries are consistently wage-led or profit-led, while others transition or fall into ambiguous territory. These findings underscore the importance of country-specific institutional structures such as labor market institutions, financial systems, and openness in shaping macroeconomic outcomes. The study contributes to the literature on functional income distribution by offering a comparative and time-sensitive assessment of how distributional changes influence demand formation. It also provides relevant insights for macroeconomic policy, suggesting that growth strategies should be tailored to the structural features of each economy rather than relying on uniform prescriptions.

Funktionel indkomstfordeling ; Lønandel og profitandel ; Post-Keynesiansk økonomi ; Lokal projektion ; Makroøkonomi

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