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The Wage-Productivity Gap Revisited: Is the Labour Share Neutral to Employment?

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Author Info

  • Karanassou, Marika

    ()
    (Queen Mary, University of London)

  • Sala, Hector

    ()
    (Universitat Autònoma de Barcelona)

Abstract

This paper challenges the prevailing view of the neutrality of the labour income share to labour demand, and investigates its impact on the evolution of employment. Whilst maintaining the assumption of a unitary long-run elasticity of wages with respect to productivity, we demonstrate that productivity growth affects the labour share in the long run due to frictional growth (that is, the interplay of wage dynamics and productivity growth). In the light of this result, we consider a stylised labour demand equation and show that the labour share is a driving force of employment. We substantiate our analytical exposition by providing empirical models of wage setting and employment equations for France, Germany, Italy, Japan, Spain, the UK, and the US over the 1960-2008 period. Our findings show that the time-varying labour share of these countries has significantly influenced their employment trajectories across decades. This indicates that the evolution of the labour income share (or, equivalently, the wage-productivity gap) deserves the attention of policy makers.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5092.

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Length: 43 pages
Date of creation: Jul 2010
Date of revision:
Publication status: published as 'The Role of the Wage-Productivity Gap in Economic Activity' in: International Review of Applied Economics, 2014, 28 (4), 436-459
Handle: RePEc:iza:izadps:dp5092

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Keywords: wages; productivity; labour income share; employment;

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References

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  1. Blanchflower, D. & Oswald, A., 1989. "The Wage Curve," Papers 340, London School of Economics - Centre for Labour Economics.
  2. Moriguchi, Chiaki, 2010. "Top wage incomes in Japan, 1951-2005," Journal of the Japanese and International Economies, Elsevier, vol. 24(3), pages 301-333, September.
  3. Pissarides, Christopher A, 1991. "Real Wages and Unemployment in Australia," Economica, London School of Economics and Political Science, vol. 58(229), pages 35-55, February.
  4. Jordi Galí, 2011. "The Return Of The Wage Phillips Curve," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 436-461, 06.
  5. Fabienne Llense, 2008. "French CEO Compensations: What is the Cost of a Mandatory Upper Limit?," CESifo Working Paper Series 2402, CESifo Group Munich.
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Cited by:
  1. Marika Karanassou & Hector Sala, 2012. "Inequality and Employment Sensitivities to the Falling Labour Share," The Economic and Social Review, Economic and Social Studies, vol. 43(3), pages 343-376.
  2. Dario JUDZIK & Hector SALA, 2013. "Productivity, deunionization and trade: Wage effects and labour share implications," International Labour Review, International Labour Organization, vol. 152(2), pages 205-236, 06.

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