Excessive Wages and the Return on Capital
AbstractReceived wisdom suggests that ÃƒÂ¢Ã¯Â¿Â½Ã¯Â¿Â½excessiveÃƒÂ¢Ã¯Â¿Â½Ã¯Â¿Â½ wages, defined as the part of real wages that do not follow labour productivity developments, are adversely associated with the return on capital. This paper argues that excessive wages and profits are better thought as responses to changes in the economic, political and institutional environment and there is no a priori reason for a negative relationship between them. We thus investigate whether there is a causal effect of excessive wages on capital return using aggregate panel data for 19 OECD countries for the period 1970-2000. We account for the endogeneity of excessive wages by exploiting variations in institutional and labour market characteristics. Our main finding is that excessive wages do not affect the return on capital. This result remains robust to alternative empirical specifications and to alternative definitions of profitability and excessive wages, and questions the standard advice by international economic organizations on wage moderation.
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Bibliographic InfoPaper provided by Athens University of Economics and Business in its series DEOS Working Papers with number 1104.
Date of creation: 10 Jan 2011
Date of revision:
capital return; Ã¢ï¿½ï¿½excessiveÃ¢ï¿½ï¿½ wages; productivity; endogeneity.;
Other versions of this item:
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-23 (All new papers)
- NEP-LAB-2011-01-23 (Labour Economics)
- NEP-MAC-2011-01-23 (Macroeconomics)
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