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Capital Deepening and Wage Differentials: Germany vs. US

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Author Info

  • Koeniger, Winfried

    ()
    (University of St. Gallen)

  • Leonardi, Marco

    ()
    (University of Milan)

Abstract

Capital deepening may affect the evolution of the wage differential between skilled and unskilled workers differently in countries with different labor market institutions. If labor market institutions raise the relative wage of unskilled workers in Germany, firms have incentives to invest relatively more into capital equipment complementary to unskilled workers. Instead in the US, where wage-compressing institutions are weaker, firms invest more in high-skilled workers. We provide evidence consistent with this view based on an industry panel for West Germany and the US between the 1970s and 1990s. We show that capital equipment per worker is less positively associated with the wage differential in West Germany than in the US. This descriptive evidence is robust to many alternative measures for capital and skills. Our estimates imply that capital deepening in Germany in the 1980s is associated with a reduction in the wage differential of about 10-20% in most industries. In the US instead, capital deepening is associated with an increase of the wage differential between 5 and 15% in most industries.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2065.

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Length: 52 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:iza:izadps:dp2065

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Keywords: capital deepening; skill premium; wage floors; institutions;

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References

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Citations

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Cited by:
  1. Daniel Felsenstein, 2011. "Capital Deepening and Regional Inequality: An Empirical Analysis (refereed paper)," ERSA conference papers ersa10p759, European Regional Science Association.
  2. Cappellari, Lorenzo & Dell'Aringa, Carlo & Leonardi, Marco, 2012. "Temporary Employment, Job Flows and Productivity: A Tale of Two Reforms," IZA Discussion Papers 6526, Institute for the Study of Labor (IZA).
  3. Dew-Becker, Ian & Gordon, Robert J, 2008. "Controversies about the Rise in American Inequality: A Survey," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6817, C.E.P.R. Discussion Papers.
  4. Federico Cingano & Marco Leonardi & Julian Messina & Giovanni Pica, 2013. "Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 337, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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