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Falling labour share and anaemic growth in Portugal: A post-Keynesian econometric analysis

Published online by Cambridge University Press:  25 September 2023

João Alcobia Open the ORCID record for João Alcobia [Opens in a new window]  and
Ricardo Barradas Open the ORCID record for Ricardo Barradas [Opens in a new window]
João Alcobia
Affiliation:
ISEG, Universidade de Lisboa and REM/UECE, Lisboa, Portugal
Ricardo Barradas*
Affiliation:
Instituto Universitário de Lisboa (ISCTE-IUL), Centro de Estudos sobre a Mudança Socioeconómica e o Território (DINÂMIA’CET), Lisboa, Portugal
*
Corresponding author: Ricardo Barradas; Email: ricardo_barradas@iscte-iul.pt
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Abstract

In recent decades, the labour share has experienced a downward trend in Portugal at the same time as a weaker and anaemic growth pattern. This seems to suggest that the fall in the labour share represents an important constraint on Portuguese economic growth, which is contrary to the orthodox claims around wage restraint policies – namely, that such policies are a necessary condition of improved macroeconomic performance, owing to their positive effects on private investment through higher profits and on net exports through reduced unit labour costs and a corresponding rise in competitiveness. This study assesses the relationship between labour share growth and economic growth by performing a time series econometric analysis focused on Portugal from 1971 to 2021. Findings show that labour share growth has positively impacted on economic growth in Portugal, which is in line with heterodox claims and particularly with post-Keynesian economics on the beneficial effects on private consumption played by the growth of wages. Findings also confirm that the Portuguese economy has followed a wage-led growth regime instead of a profit-led growth regime; that is, a rise in wages increases aggregate demand and, therefore, boosts economic growth because its beneficial effect on private consumption more than compensates for a prejudicial effect on private investment and on net exports. The study points out the urgent need to adopt public policies to support the growth of wages to avoid more decades of dismal growth and a new ‘secular stagnation’ in Portugal.

Keywords

economic growthgeneralised method of moments estimatorlabour sharePortugalpost-Keynesian economicsC22D33E12O47
Type
Original Article
Information
The Economic and Labour Relations Review , Volume 34 , Issue 3 , September 2023 , pp. 536 - 554
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of UNSW Canberra

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