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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. Lorenzo Cappellari & Carlo Dell’Aringa & Marco Leonardi, 2012. "Temporary Employment, Job Flows and Productivity: A Tale of Two Reforms," Economic Journal, Royal Economic Society, vol. 122(562), pages F188-F215, 08.
  2. Robert J. Gordon & Ian Dew-Becker, 2008. "Controversies about the Rise of American Inequality: A Survey," NBER Working Papers 13982, National Bureau of Economic Research, Inc.
  3. Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2013. "Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy," Development Working Papers 354, Centro Studi Luca d\'Agliano, University of Milano.
  4. Daniel Felsenstein, 2011. "Capital Deepening and Regional Inequality: An Empirical Analysis (refereed paper)," ERSA conference papers ersa10p759, European Regional Science Association.

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