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The effects of wage volatility on growth

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  • Jetter, Michael
  • Nikolsko-Rzhevskyy, Alex
  • Smith, William T.

Abstract

This paper shows that the volatility of wages has significant effects on a country’s rate of economic growth. Our theoretical framework suggests two distinct channels in which wage volatility affects growth: a positive direct way and a negative indirect way. The direct effect stems from precautionary savings, whereas the indirect effect works through the mediating role of government size. In the empirical part, we use a 3SLS approach to analyze a panel of 20 high-income OECD countries and find strong evidence for the existence of both effects. These results carry general and specific implications. In general, ignoring indirect effects operating through government size may mask the real net effects of volatility on growth, which could result in misleading conclusions. Specific to wage volatility, our results suggest that the net effect on economic growth depends on both government size and the wage premium from working in the private sector. Within our sample, we find evidence for both – countries for which wage volatility is beneficial to growth and others for which it is detrimental.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 37 (2013)
Issue (Month): C ()
Pages: 93-109

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Handle: RePEc:eee:jmacro:v:37:y:2013:i:c:p:93-109

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Economic growth; Volatility; Government size; Wages; 3SLS;

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Cited by:
  1. Eduardo Zilberman & Anna Dos Reis, 2013. "On the Optimal Size of Public Employment," 2013 Meeting Papers 482, Society for Economic Dynamics.
  2. Jetter, Michael, 2013. "Volatility and Growth: Governments are Key," IZA Discussion Papers 7826, Institute for the Study of Labor (IZA).
  3. Michael Jetter, 2013. "Volatility and Growth: An Explanation for the Disagreement," DOCUMENTOS DE TRABAJO CIEF 010944, UNIVERSIDAD EAFIT.

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