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The effects of wage volatility on growth

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  • Jetter, Michael
  • Nikolsko-Rzhevskyy, Alex
  • Smith, William T.

Abstract

This paper shows that the volatility of wages has significant effects on a country’s rate of economic growth. Our theoretical framework suggests two distinct channels in which wage volatility affects growth: a positive direct way and a negative indirect way. The direct effect stems from precautionary savings, whereas the indirect effect works through the mediating role of government size. In the empirical part, we use a 3SLS approach to analyze a panel of 20 high-income OECD countries and find strong evidence for the existence of both effects. These results carry general and specific implications. In general, ignoring indirect effects operating through government size may mask the real net effects of volatility on growth, which could result in misleading conclusions. Specific to wage volatility, our results suggest that the net effect on economic growth depends on both government size and the wage premium from working in the private sector. Within our sample, we find evidence for both – countries for which wage volatility is beneficial to growth and others for which it is detrimental.

Suggested Citation

  • Jetter, Michael & Nikolsko-Rzhevskyy, Alex & Smith, William T., 2013. "The effects of wage volatility on growth," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 93-109.
  • Handle: RePEc:eee:jmacro:v:37:y:2013:i:c:p:93-109
    DOI: 10.1016/j.jmacro.2013.05.010
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    Cited by:

    1. Anna Carolina Saba dos Reis & Eduardo Zilberman, 2013. "On the Optimal Size of Public Employment," Textos para discussão 612, Department of Economics PUC-Rio (Brazil).
    2. Jetter, Michael, 2014. "Volatility and growth: Governments are key," European Journal of Political Economy, Elsevier, vol. 36(C), pages 71-88.
    3. Michael Jetter, 2013. "Volatility and Growth: An Explanation for the Disagreement," Documentos de Trabajo CIEF 010944, Universidad EAFIT.
    4. repec:bla:worlde:v:40:y:2017:i:6:p:1040-1052 is not listed on IDEAS

    More about this item

    Keywords

    Economic growth; Volatility; Government size; Wages; 3SLS;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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