We analyse the relationship between functional income distribution and economic growth in France and Germany from 1960 until 2005. The analysis is based on a demand-driven distribution and growth model for an open economy inspired by Bhaduri & Marglin (1990), which allows for profit- or wage-led growth. First, we apply a single equation approach, estimating the effects of redistribution on the demand aggregates and summing up these effects in order to obtain the total effect of redistribution on GDP growth. Since interactions between the demand aggregates are omitted from this approach, we also apply a simulation approach taking into account these interactions. In the single equation approach we find that growth in France was wage-led, whereas the effect in Germany was undetermined. The results of the simulation approach, however, suggest that the wage-led nature of growth in France becomes even more pronounced when considering the interactions between the demand aggregates, while in Germany the simulations show a tendency towards wage-led growth in the longer run.
