Is the Economic Growth Regime in Iran Wage-led or Profit-led?

This study investigates the relationship between factor income distribution and aggregate demand in the context of the Post-Keynesian school, using data from Iran over the period 1346-1393. To this end, profit share and GDP growth are used as proxies for factor income distribution and demand growth, respectively. The results of the cointegration analysis based on the ARDL approach show that profit share and economic growth have a positive and significant effect on each other in the long-run. Furthermore, the results based on the error correction model show that, in the long-run, there is a bidirectional Granger causality between profit share and economic growth. However, in the short-run, Granger causality runs only from profit share to economic growth. The most important consequence of such results is that there is a profit-led demand (growth) regime for Iran in both the short-run and the long-run. Based on this result, the use of capital-intensive technologies instead of labor-intensive technologies increases the share of profits and thus leads to an increase in demand and economic growth. The implication of this finding is that the government should pursue policies to encourage and facilitate firms to adopt capital-intensive technologies, aimed at increasing the income of society as a whole. On the other hand, the government should also adopt effective policies to improve income distribution, increasing welfare.