Distribution and capacity utilization in the United States: evidence from state-level data

Abstract

Applying previously unused regional data to the problem of wage- versus profit-led growth, this paper estimates a demand-and-distribution system for a panel of US states for the years 1974 to 2014. Using variation in minimum-wage policy across states as an instrument for the labor share, I find that – at a regional level – the United States is strongly wage-led. In the absence of a satisfactory econometric identification strategy, I estimate the distributive curve non-parametrically. The results suggest the presence of significant non-linearities, with US states exhibiting profit-squeeze dynamics at low levels of capacity utilization and wage-squeeze dynamics at high levels. These results suggest difficulties for wage-led policy akin to a coordination failure.