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'Excessive' wages and the return on capital

Author

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  • Margarita Katsimi
  • Sarantis Kalyvitis
  • Thomas Moutos

Abstract

Received wisdom suggests that 'excessive' wages, defined as the part of real wages that do not follow labour productivity developments, are adversely associated with the return on capital. This paper argues that excessive wages and profits are better thought of as responses to changes in the economic, political and institutional environment, and there is no a priori reason for a negative relationship between them. We thus investigate whether there is a causal effect of excessive wages on capital return using aggregate panel data for 19 OECD countries for the period 1970--2000. We account for the endogeneity of excessive wages by exploiting variations in institutional and labour market characteristics. Our main finding is that excessive wages do not affect the return on capital. This result remains robust to alternative empirical specifications and to alternative definitions of profitability and excessive wages, and questions the standard advice by international economic organizations on wage moderation. Copyright The Author 2011. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.

Suggested Citation

  • Margarita Katsimi & Sarantis Kalyvitis & Thomas Moutos, 2012. "'Excessive' wages and the return on capital," Cambridge Journal of Economics, Oxford University Press, vol. 36(2), pages 435-461.
  • Handle: RePEc:oup:cambje:v:36:y:2012:i:2:p:435-461
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    File URL: http://hdl.handle.net/10.1093/cje/ber019
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    References listed on IDEAS

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    1. Philip Du Caju & François Rycx & Ilan Tojerow, 2011. "Inter‐Industry Wage Differentials: How Much Does Rent Sharing Matter?," Manchester School, University of Manchester, vol. 79(4), pages 691-717, July.
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    Cited by:

    1. Georgios Christou & Panagiotis Chronis, 2017. "Markups and fiscal policy: analytical framework and an empirical investigation," Working Papers 221, Bank of Greece.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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