Real Wages, Aggregate Demand, and the Macroeconomic Travails of the US Economy: Diagnosis and Prognosis
Trinity College Department of Economics Working Paper No. 10-05
38 Pages Posted: 29 Aug 2010
Date Written: August 26, 2010
This chapter argues that, while much attention has been paid to developments in the financial sector as causes of the Great Recession, the ultimate cause of the crisis was, in fact, longer term trends in the real economy. Specifically, it is argued that the tendency for real wages to grow slower than productivity since the 1970s has not only generated ever-increasing income inequality in the US, but has also led to a structural flaw in the process that creates the demand necessary for high employment and rising living standards. Although household debt accumulation postponed the “day of reckoning” associated with this structural flaw, the effect of sluggish real wage growth on the incomes of working households now has the potential to create a future of secular stagnation, not just for workers, but for the US economy as a whole.
Keywords: real wage growth, productivity growth, aggregate demand, household debt, Great Recession
JEL Classification: E21, E24, E25, E61, E66
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