Three-Departmental Schema:

Kalecki announces his Marxian pedigree by subdividing the economy into three Departments; Department I producing investment goods, Department II producing consumption goods for capitalists and Department III producing consumption goods for workers. Suppose that in a certain period, the annual wage bill increases as a result of increasing wage rates. Let the  pre-change wage bills in the first two Departments be denoted by wI and wII  and  the fraction by which wages change by α.

Thus the increment in the wage bill in the first two Departments is  α(w₁ + w_II). Profits in these Departments decline correspondingly. However, the increment in the wage bill of these Departments means an equal rise in profits of Department III.

Either output or prices or both will rise there. Total profits remain unaltered.  In the above framework the effect of a rise in wages is the rise in the prices of investment goods and capitalist consumption goods.  Since the volume of capitalist investment and consumption is maintained in the short run, profits in the first two Departments rise by 1+α. The production and consumption of wage goods remain unchanged. As a result, profits in the third Department also rise by (1+α). Thus the volume of production in all three Departments remains unaltered while the value in each increases by (1+α).  

Higher markups will encourage trade unions to bargain with their employers for higher wages since firms can 'afford' to pay them. If their demands are granted but other things remain the same, prices will also increase. A fresh round of demands for higher wages would emanate and a price-wage spiral would ensue. However, businessmen would be averse to making their goods more and more expensive. Thus, trade union power restrains the magnitude of markups. If working class action is powerful, a redistribution of national income from profits to wages could take place.

In our example, profits in Department III increase in the same proportion as wage rates. However, if there is a redistribution as a result of the reduction in markups there, the wage bill in the third Department increases more than the wage rates. There is a rise in output and employment there but not in the first two Departments.