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Capital deepening and wage differentials: Germany versus US
[‘Technical change, inequality, and the labor market’]

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  • Winfried Koeniger
  • Marco Leonardi

Abstract

In flexible labour markets, capital increases the productivity of skilled workers more than that of unskilled workers, and in the US faster investment is associated with wider wage inequality. But labour market institutions that keep unskilled workers’ wages high also imply that firms may find it profitable to invest so as to boost those workers’ productivity. Our empirical analysis based on industry-level data confirms that a higher capital intensity in Germany is associated with smaller wage differentials and with a larger share of unskilled workers in the labour costs. Changes in capital–labour ratios during the 1980s reduced wage differentials by 5–8% in German industries, while in the US capital deepening in such industries as machinery and retail was accompanied by an increase of wage differentials larger than 7%.— Winfried Koeniger and Marco Leonardi

Suggested Citation

  • Winfried Koeniger & Marco Leonardi, 2007. "Capital deepening and wage differentials: Germany versus US [‘Technical change, inequality, and the labor market’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 22(49), pages 72-116.
    • Handle: RePEc:oup:ecpoli:v:22:y:2007:i:49:p:72-116.
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    File URL: http://hdl.handle.net/10.1111/j.1468-0327.2007.00173.x
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    1. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09i8hjg0kpi is not listed on IDEAS
    2. Zsófia L. Bárány, 2016. "The Minimum Wage and Inequality: The Effects of Education and Technology," Journal of Labor Economics, University of Chicago Press, vol. 34(1), pages 237-274.
    3. Alberto Alesina & Michele Battisti & Joseph Zeira, 2018. "Technology and labor regulations: theory and evidence," Journal of Economic Growth, Springer, vol. 23(1), pages 41-78, March.
    4. repec:hal:spmain:info:hdl:2441/eu4vqp9ompqllr09i8hjg0kpi is not listed on IDEAS
    5. Battisti, Michele & Gatto, Massimo Del & Parmeter, Christopher F., 2022. "Skill-biased technical change and labor market inefficiency," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    6. Joanna Tyrowicz & Magdalena Smyk, 2019. "Wage Inequality and Structural Change," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 141(2), pages 503-538, January.
    7. Zsofia Barany, 2016. "The Minimum Wage and Inequality: The Effects of Education and Technology," SciencePo Working papers hal-03594158, HAL.
    8. Conti, Maurizio & Sulis, Giovanni, 2016. "Human capital, employment protection and growth in Europe," Journal of Comparative Economics, Elsevier, vol. 44(2), pages 213-230.
    9. Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2010. "The effects of employment protection legislation and financial market imperfections on investment: evidence from a firm-level panel of EU countries [Technology and labour regulations]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 25(61), pages 117-163.
    10. Geran Tian & Weixing Wu, 2022. "Employment protection, production flexibility and corporate capital spending," Australian Economic Papers, Wiley Blackwell, vol. 61(1), pages 1-23, March.
    11. M. Battisti & M. Del Gatto & A. F. Gravina & C. F. Parmeter, 2021. "Robots versus labor skills: a complementarity/substitutability analysis," Working Paper CRENoS 202104, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    12. Mary O'Mahony & Marcel P. Timmer, 2009. "Output, Input and Productivity Measures at the Industry Level: The EU KLEMS Database," Economic Journal, Royal Economic Society, vol. 119(538), pages 374-403, June.
    13. Zsofia Barany, 2011. "The minimum wage and inequality - the effects of education and technology," SciencePo Working papers hal-01069474, HAL.
    14. repec:hal:wpspec:info:hdl:2441/eu4vqp9ompqllr09i8hjg0kpi is not listed on IDEAS
    15. Jian Ding & Yixiao Zhou, 2021. "Did the Labor Contract Law Affect the Capital Deepening and Efficiency of Chinese Private Firms?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 29(5), pages 105-126, September.
    16. Aijun Guo & Xiaojiang Ding & Fanglei Zhong & Qingping Cheng & Chunlin Huang, 2019. "Predicting the Future Chinese Population using Shared Socioeconomic Pathways, the Sixth National Population Census, and a PDE Model," Sustainability, MDPI, vol. 11(13), pages 1-17, July.
    17. Ryosuke Okazawa, 2013. "Skill-biased technical change, educational choice, and labor market polarization: the U.S. versus Europe," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 11(3), pages 321-342, September.
    18. repec:hal:spmain:info:hdl:2441/4jgjdlef848r49dq2dv8go26r7 is not listed on IDEAS
    19. Kong, Dongmin & Liu, Shasha & Xiang, Junyi, 2018. "Political promotion and labor investment efficiency," China Economic Review, Elsevier, vol. 50(C), pages 273-293.

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