Structural change, aggregate demand and employment dynamics in the OECD, 1970–2010

•Baumol's model of structural change is combined with a model of demand growth.•The demand regime in the OECD is found to be ‘wage-led’.•The demand augmented Baumol model yields a prediction for the dynamics of employment.•This prediction tracks the actual employment dynamics remarkably well.

The paper combines Baumol's model of structural change with a model of aggregate demand growth in the Keynesian–Kaleckian tradition to predict the dynamics of aggregate employment. The model for the demand regime is estimated with – and Baumol's model for the productivity regime is calibrated on – OECD data. The trajectory for employment predicted by the combination of the two models tracks the actual employment dynamics in the OECD over the period 1970–2010 remarkably well.