IS GROWTH IN THE JORDANIAN ECONOMY WAGE-LED OR PROFIT-LED?

Abstract

Purpose- For too long, the performance of the Jordanian economy has been dissapointing. During the period 2010-2020, the mean annual growth rate in real Gross Domestic product (GDP) was equal to 2.0 percent. In addition, the overall unemployment rate increased from 12.5 percent in 2010 to 23.2 percent in 2020. To decrease the doublie-digit unemployment, any growth strategy requires a good understanding of the characteristics of the Jordanian economy. In other words, increasing the profit share in a wage-led economy, and increasing the wage share in a profit-led economy will both have negative consequences to economic growth. Therefore, it important to identify whether the Jordanian economic regime is wage-led or profit-led. Methodology- This paper investigates the effect of changes in the functional income distribution on economic growth in Jordan during the period 1990-2020. An autoregressive distributed lag (ARDL) approach is used to assess the presence of the long-run relationship between changes in income distribution and aggregate demand. Findings- Based on the estimated results, it is argued that the the demand regime in the Jordanian economy Jordan is wage-led. In other words, an increase in the wage-share leads to higher economic growth. Conclusion- Given the challenge of unemployment, the Jordanian government and the leaders of the private sector should not allow the supply and demand sides of the labor market determine wages. The economy needs pro-labor institutional reforms to realize strong and sustainable economic growth rates.

Keywords

• Jordan
• growth
• unemployment
• wage-led
• profit-led
• net exports
• ARDL
• cointegration

References

1. Bhaduri, A., and Marglin, S. (1990). Unemployment and the real wage: the economic basis for contesting political ideologies. Cambridge Journal of Economics, 14(4), 375-393.
2. Blecker, R. (1989). International competition, income distribution and economic growth. Cambridge Journal of Economics, 13, 395-412.
3. Blecker, R. (2002). Demand, distribution, and growth in neo-Kaleckian macro models, in M. Setterfield (ed.), The Economics of Demand-Led Growth: Challenging the Supply-Side Vision of the Long Run, Cheltenham, UK and Northampton, MA: Edward Elgar, 129–152.
4. Blecker, R. (2011). Open economy models of distribution and growth, in E. Hein and E. Stockhammer (eds), A Modern Guide to Keynesian Macroeconomics and Economic Policies, Cheltenham, UK and Northampton, MA: Edward Elgar, 215-293.
5. Blecker, A. (2016). Wage-led versus profit-led demand regimes: the long and the short of it. Review of Keynesian Economics, 4(4), 373-390.
6. Hein, E., and Vogel, L. (2008). Distribution and growth reconsidered: empirical results for six OECD countries. Cambridge Journal of Economics, 32(3), 479-511.
7. Kalecki, M. (1954), Theory of economic Dynamics, London, UK: Unwin, reprinted New York, NY, USA: Monthly Review Press, 1968.
8. Kurt, Ekin Ozan. (2020),. Functional income distribution, capacity utilization, capital accumulation and productivity growth in Turkey. Metroeconomica, 71, 734-766.

9. Onaran, Ö. and Stockhammer, E. (2004). Do profits affect investments? Am empirical test based on the Bhaduri-Marglin model, in E. Hein, A. Heise and A. Truger (eds), Wages, Employment, Distribution and Growth: International Perspectives, Basingstoke, UK: Palgrave Macmillan.