Growth Regime Analysis

A demand regime is wage-led if raising the wage share (lowering the profit share) increases aggregate demand and output, which happens when consumption out of wages is high relative to the boost a higher profit share gives to investment and net exports. It is profit-led if the opposite holds — a higher profit share raises demand because investment and competitiveness-driven exports respond strongly to profitability. The defining test is the sign of the response of output to a change in the wage share, and whether an economy is wage-led or profit-led shapes whether wage restraint helps or hurts growth.

They answer different questions. The demand regime is a behavioral property — how output responds to a redistribution between wages and profits. The growth driver is a descriptive fact about which component of demand actually led growth in a given period, such as net exports in an export-led model or household consumption in a debt-led one. A country can be, say, profit-led in its regime while its observed growth was driven by debt-financed consumption, so the two characterizations must be kept analytically separate even though they are related.

The growth-model perspective is explicitly a demand-side response to varieties of capitalism. Where varieties of capitalism explains national differences through supply-side firm coordination, skills, and institutional complementarities, Baccaro and Pontusson argue that comparative political economy neglected aggregate demand and distribution, and that growth depends on which demand components lead and on the wage-profit split. The two are best treated as complementary lenses: supply-side institutions and demand-side growth models jointly characterize a national economy.