Working Papers

  • Cruz, M.D. (2022). Labor Productivity, Real Wages, and Employment: Evidence from a Panel of OECD Economies over 1960-2019. Working Papers PKWP 2203, Post Keynesian Economics Society (PKES). Revise and Resubmit. PDF

Abstract: This study empirically investigates the relationship between labor productivity (LP), average real wage (RW), and employment (EMP). The paper's main goal is to provide a test of competing theories of growth and income distribution. Standard theory predicts that real wages should increase following increases in labor productivity. Alternative theories and efficiency wage theories suggest that it is the distribution that causes changes in labor productivity. Theory delivers ambiguous predictions regarding the ultimate effects on employment, which can be either negative if factor substitution prevails or positive if higher wages and higher output per worker generate additional aggregate demand and, therefore, employment. I study a panel of 25 OECD economies over 1960-2019, using several approaches: 1) ECM, DOLS, FMOLS, and ARDL regressions with exogenous and endogenous variables, and 2) a VECM exercise as a robustness check. First, there is a long-run relationship between these variables when LP and RW are considered dependent variables. Second, EMP cannot be explained statistically by LP and RW in the long run: it is weakly exogenous, implying that OECD economies as a group have been, on average labor-constrained in the last six decades. Third, I find a positive two-way causality between LP and RW in both the long and short run, supporting the induced technical change, efficiency wages, and bargaining theories over the neoclassical theory. Fourth, concerning the LP-EMP nexus, in the long run, the results show a negative association, statistically significant for the single-equation estimates from EMP to LP in most specifications. Fifth, there is a positive effect running from EMP to RW in most specifications, statistically significant only in the single-equation. Sixth, both LP positively affects EMP, and RW negatively impacts EMP in the short run.

  • Cruz, M.D., & Tavani, D. (2021). Classical Political Economy and Secular Stagnation. FMM Working Papers No. 71, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute. Revise and Resubmit. PDF

Abstract: This paper presents a model of secular stagnation, income and wealth distribution, and employment in the Classical Political Economy tradition. The model can be contrasted with established neoclassical accounts of secular stagnation (Piketty, 2014; Gordon, 2015). In these explanations, an exogenous reduction in the growth rate g —be that because of declining fertility or the exhaustion of path-breaking scientific discoveries—increases the difference with the endogenous rate of return to capital r. The capital-income ratio rises, and if the elasticity of substitution is higher than one, the wage share falls. Importantly, both Piketty and Gordon assume full employment at all times. In our explanation, which does not presuppose full employment, the key tension is between profit-driven capital accumulation and wage-driven labor-augmenting technical change: both these features are defining for Classical Political Economy and have been emphasized in recent heterodox macro literature. Institutional or technological shocks to income distribution that lower the wage share initially foster capital accumulation –which is profit-driven– and increase wealth inequality. However, the effect on long-run growth is negative, because a reduction in the wage share lessens the incentives by firms to introduce labor-saving innovation, which is wage-driven. The capital/income ratio must rise in order to restore balanced growth and stabilize the labor market in the long run; and the increase in wealth inequality is permanent. The ultimate effect on long-run employment depends on the relative strength of the response of labor-augmenting technical change vis-a-vis the response of real wage growth to labor market institutions: we identify a simple condition that delivers either a wage-led long-run employment regime or a profit-led long-run employment regime. We then test the model using time-series data for the U.S. (1990-2019): the empirical analysis offers support to the main predictions of our model, and to the employment-population ratio being wage-led.

  • Cruz, M.D., & Sedai, A.K. (2021). The Effect of Corruption on Foreign Direct Investment in Natural Resources: A Latin American Case Study. CAMA Working Papers No. 98/2021. Revised and Resubmitted. PDF

Abstract: This study looks at the relationship between corruption and foreign direct investment (FDI) in natural resources using a panel of 20 Latin American countries from 1995-2019. We find that lower levels of corruption have a positive and significant impact on resource FDI supporting the grabbing hand hypothesis. A one-point increase in the Corruption Perception Index (CPI) [less corruption] is associated with an increase between 52-57 million dollars across models with varying controls. Results also show a nonlinear relationship between CPI and resource FDI, suggesting that when a country becomes less corrupt and improves its economic, social and political performance, it usually attracts more resource FDI. The analysis is robust to alternate measures of corruption (CPI, ICRG, and WGI) and different specifications of the dynamic panel model. Finally, the study highlights significant precautions and pre-conditions required to increase economic development when attracting natural resource-based FDI.

  • Perez, E., & Cruz, M.D. (2017). Monitoring the Evolution of Latin American Economies Using a Flow-of-Funds Framework. ECLAC-Financing for Development Series No. 265. PDF

Abstract: Flow-of-funds accounting permit to monitor the financial sector in terms of flows and stocks and to analyze its relationship with the real sector. These show inter-sectoral financial flows, capture balance sheet positions and all financial transactions by instrument, type and economic sector. The construction of flow-of-funds accounts has been traditionally spearheaded by the central banks of developed nations including the Federal Reserve, the European Central Bank and the Bank of Japan. In spite of its usefulness, flow-of-funds accounting has not experienced a parallel development for developing countries including for those of Latin American, In order to start filling this gap we undertook the construction of a data base of flow-of-funds account matrices for six Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico and Peru) that consider only flows for the period 1980-2015 using yearly and quarterly data when available. As a basis for comparison we also carried out the same exercise for four Asian countries (Malaysia, Philippines, South Korea, and Thailand). The construction of flow-of-funds account matrices follows the methodology proposed by Dawson (2004). In this paper we explain the methodology for the construction of flow-of-funds accounts and we exemplify their use for two source cases of study: the Mexican Crisis (1994-1995) and the Asian Crisis (1997-1998). Using similar sources of data, the same methodology and approach for the construction of all the flow-of-funds matrices allow comparisons among countries relating to the impact, manifestations of these crisis episodes and policy reactions to confront their effects. The use of homogeneous data and methodology also permits to trace contagion effects between countries.

Works in Progress

  • Cruz, M.D., & Tavani, D. Income Distribution and Wealth Inequality in Post-liberalization China: A Classical Growth Model

  • Cruz, M.D., & Sedai, A.K. Changes in Income Distribution in India: Contribution of its Main Determinants