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Internal devaluation in a wage-led economy: the case of Spain

Author

Listed:
  • Ignacio Álvarez
  • Jorge Uxó
  • Eladio Febrero

Abstract

The aim of this paper is to study the impact of wage devaluation policy on the recent recovery experienced by the Spanish economy. For this purpose, we use the theoretical distinction between wage-led and profit-led economies. We address, for the first time in the literature, an in-depth analysis of the Spanish economy using the Bhaduri-Marglin model. We find that the Spanish economy can be characterized as a wage-led economy: a fall in the wage share has a contractionary effect on GDP growth. Our results point to two important conclusions, when we use this model to assess the internal devaluation policy. First, we do not see an export-led recovery in Spain during past years, driven by recent supply-side reforms. And, second, a pro-labour distribution of income would reinforce economic growth: according to our calculations, internal devaluation policy detracted an average of 0.2 percentage points of annual economic growth during the period 2009–17.

Suggested Citation

  • Ignacio Álvarez & Jorge Uxó & Eladio Febrero, 2019. "Internal devaluation in a wage-led economy: the case of Spain," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 43(2), pages 335-360.
    • Handle: RePEc:oup:cambje:v:43:y:2019:i:2:p:335-360.
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    File URL: http://hdl.handle.net/10.1093/cje/bey027
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    Cited by:

    1. Luis Cárdenas & Paloma Villanueva, 2021. "Flexibilization at the Core to Reduce Labour Market Dualism: Evidence from the Spanish Case," British Journal of Industrial Relations, London School of Economics, vol. 59(1), pages 214-235, March.
    2. Piotr Nowaczyk & Joanna Hernik, 2020. "Adopting the Euro will Cause an Increase in Prices: A Study on Inflationary Processes in Euro Area Member States," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 377-403.
    3. Jakob Kapeller & Claudius Graebner & Philipp Heimberger, 2019. "Economic Polarisation in Europe: Causes and Policy Options," ICAE Working Papers 99, Johannes Kepler University, Institute for Comprehensive Analysis of the Economy.

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