International competition, income distribution and economic growth

This paper shows that the neo-Keynesian case for wage-led growth does not generally hold in an open economy model. Wage increases cause a loss of competitiveness that reduces the trade balance. If the economy is relatively open to trade and price elasticities satisfy certain restrictions, the worsening of the trade balance more than outweighs the increase in workers' consumption, thus reducing the growth rate. The main theoretical innovation is a flexible markup pricing rule that allows changes in unit labor costs and exchange rates to affect profit margins. Implications for international relations and class conflict are discussed. Copyright 1989 by Oxford University Press.