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The role of wages in triggering innovation and productivity: A dynamic exploration for European economies

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  • Fontanari, Claudia

Abstract

This paper addresses the issue of sluggish productivity growth in advanced countries and investigates its underlying causes, focusing on the direct impact of real wages. Analyzing data from 14 European countries spanning 1995 to 2018, we employ Local Projections to estimate the Sylos Labini productivity equation. Advancing our understanding of established literature, we dynamically explore the wage-productivity nexus, testing the hypothesis that higher wages enhance productivity independently of aggregate demand. Our findings indicate that wages exert a persistent and direct positive effect on productivity, both at the aggregate and sectoral levels. This effect remains stable over time, even with large changes, and is more pronounced during periods of low or negative wage growth. Moreover, higher wages prove to stimulate innovation more effectively in core countries. These findings suggest that demand-side expansionary policies would be more effective in enhancing labor productivity and long-term growth when combined with policies promoting wage growth.

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  • Fontanari, Claudia, 2024. "The role of wages in triggering innovation and productivity: A dynamic exploration for European economies," Economic Modelling, Elsevier, vol. 130(C).
    • Handle: RePEc:eee:ecmode:v:130:y:2024:i:c:s0264999323003838
    DOI: 10.1016/j.econmod.2023.106571
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    More about this item

    Keywords

    Labor productivity; Wages; Local projections; Paolo Sylos Labini; Spatial disparities;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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