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Debt burden, investment, and profit-sharing

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Abstract

This study examines the relationship among profit-sharing, debt burden, and investment. For example, firms are able to pay off debts by increasing their internal reserves. Reducing the debt burden promotes investment demand, which we regard as “the investment-led effect.” This study constructs a macrodynamic model of financial instability. That is, we consider the dynamic equation of debt burden and examine how the sharing parameter affects the dynamic system. We demonstrate that the normal profit-sharing rule makes the economy unstable, although we only consider the investment-led effect. We also show that Japan’s profit-sharing rule always makes the economy unstable.

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Notes

  1. Mainstream Japanese economists advocated lowering the minimum wage and mobilizing the labor force to help the economy (employment) in Japan recover. See, for example, Ohtake et al. (2013).

  2. For example, see Lavoie (1995), Dutt (1995), and Flaschel and Skott (2006).

  3. Ninomiya and Takami (2018) assumed a condition that a firm and its union voluntarily adopt the profit-sharing rule.

  4. See. for example, Rose (1969), Ninomiya (2006, 2018, 2022a, b), and Ninomiya and Takami (2018).

  5. Okishio (1986) formulated a simple macroeconomic model using Eq. (11). Okishio (1986) considered the budget constraints of the central bank, commercial banks, firms, and households and obtained Eq. (11), regarded as the model IS-BB analysis. Adachi (1994) formulated the micro foundation of firms and commercial banks and examined financial instability based on the IS-BB analysis. Ninomiya (2022c) presented a macrodynamics model that considered debt burden and the instability of confidence based on the IS-BB analysis.

    Lavoie and Godley (2001) and Godley and Lavoie (2007) proposed the Stock-Flow Consistent (SFC) model as an alternative for neoclassical economics. The SFC model focuses on stock-flow relations, and all sectors and financial assets are introduced into the model. Ohno and Nishi (2011) surveyed the development of the Kaleckian and Minskian models to consider the significance of the SFC model. They also discussed how the SFC model plays an important role in integrating the implications derived from these models based on Dos Santos and Zezza (2008). The SFC model can explain not only the wage-led regime but also the profit-led regime.

    Furthermore, many post-Keynesian economists have recently developed interest in financialization. Skott and Ryoo (2008) paid explicit attention to financial stock-flow relations and explored the macroeconomic implications of changes in firms’ financial decisions, “animal spirits,” and the level of interest rates. They showed that the key developments associated with the process of financialization have expansionary effects. Their discussion is very interesting, but they emphasized the medium- and long-term effects with little or no attention to issues of stability and short-run fluctuations.

  6. Ninomiya (2006) examined the case of \(I_{B} + L_{B} - \mu_{B} \bar{H}< 0\). For instance, we obtain \(i_{B} < 0\) when the investment demand decreases drastically due to an increase in firms’ debt burden. However, we assume \(i_{B} > 0\) in this study because \(i_{B} > 0\) is the general case.

  7. See Ninomiya (2007b).

  8. The method is based on Gandolfo (1997), Ninomiya (2007b), and Ninomiya and Takami (2010). This cycle is very similar to that shown by Ninomiya (2007b) and Ninomiya and Takami (2010).

  9. We use Mathematica for the numerical simulations.

  10. Japan’s profit share is smaller than 0.5. This study does not consider a dynamic wage equation. It is important to note that the change in the sharing parameter \(\theta\) is a proxy variable of the wage change (e.g., bonus). Therefore, we assume \(\rho =0.5\) in the numerical simulations.

  11. Ninomiya and Takami (2010) showed that an increase in sharing parameter makes the cycle small in contrast to this result.

  12. As previously mentioned, the sharing parameter θ in this study includes the effects of interest payments and dividends for households, as well as bonuses for laborers. Notably, Japan’s profit-sharing rule outlined in this paper is distinct from the Japanese management system. Therefore, for example, the normal profit-sharing rule presented in this paper may have been appropriate when the bubble economy occurred in Japan.

    Moreover, the dynamics of the sharing parameter θ is a proxy variable for wage (bonus) change. During recessions in Japan, the increase in the labor share has been attributed to labor hoarding. Sonoda (2017) noted that a counter-cyclical wage (labor) share occurred because the labor hoarding effect influenced the labor productivity.

    Sonoda (2017) demonstrated that after the 2000s, Japan’s distributive regime shifted from a counter-cyclical wage (labor) share regime to a pro-cyclical wage (labor) share regime. Meanwhile, Ikeda (2018) indicated that the labor hoarding effect has disappeared as a result of the collapse of the Japanese management system; he discussed a complex regime change after 2000s.

  13. However, Itami (2005) also pointed out that the causal relationship is not large.

  14. Yoshikawa (1994) also pointed out the labor share in Japan moves countercyclically in relation to the state of the economy.

  15. As previously stated, Japan was mired in a prolonged recession and deflation following the collapse of the economic bubble in 1991. We think that the unstable investment-led effect contributed to Japan’s prolonged recession.

    However, despite the fact that Japanese firms have vast internal reserves, investment in Japan has been severely restrained. Consequently, we believe that other factors, such as the declining population, productivity, and education system, may be contributing to the current economic recession in Japan.

    These factors and the effect of the profit-sharing should be examined in economic growth models such as the Solow, Goodwin, and Kaleckian models. However, we should pay attention to the decrease in investment caused by financial fragility.

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Acknowledgements

The author is grateful to anonymous referees, Professor Takeshi Nakatani (Kobe University: Emeritus ), Hiroyuki Takami (Oita University), Yasunari Koshino (Ryukyu University), and Sin Imoto (Onomichi City University) for their comments. The author extends his gratitude to the Grant-in-Aid for Scientific Research (22K01414) from Japan Society for the Promotion of Science, Shiga University, and Nihon University for their financial supports.

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  1. Faculty of Economics, Rikkyo University, 3-34-1, Nishi-Ikebukuro, Toshima, Tokyo, 171-8511, Japan

    Kenshiro Ninomiya

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Ninomiya, K. Debt burden, investment, and profit-sharing. Evolut Inst Econ Rev 20, 287–306 (2023). https://doi.org/10.1007/s40844-023-00267-7

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