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Labor Market Institutions, Wages and Investment

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  • Jörn-Steffen Pischke

Abstract

Labor market institutions, via their effect on the wage structure, affect the investmentdecisions of firms in labor markets with frictions. This observation helps explain rising wageinequality in the US, but a relatively stable wage structure in Europe in the 1980s. Thesedifferent trends are the result of different investment decisions by firms for the jobs typicallyheld by less skilled workers. Firms in Europe have more incentives to invest in less skilledworkers, because minimum wages or union contracts mandate that relatively high wages haveto be paid to these workers. I report some empirical evidence for investments in training andphysical capital across the Atlantic, which is roughly in line with this theoretical reasoning.

Suggested Citation

  • Jörn-Steffen Pischke, 2004. "Labor Market Institutions, Wages and Investment," CEP Discussion Papers dp0652, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0652
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    References listed on IDEAS

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    Cited by:

    1. Elisabetta Croci Angelini & Francesco Farina, 2007. "Technological choices under institutional constraints: measuring the impact on earnings dispersion," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 006, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
    2. Malul Miki & Luski Israel, 2009. "The Optimal Policy Combination of the Minimum Wage and the Earned Income Tax Credit," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-24, November.
    3. Koeniger, Winfried & Leonardi, Marco, 2006. "Capital Deepening and Wage Differentials: Germany vs. US," IZA Discussion Papers 2065, Institute of Labor Economics (IZA).
    4. Ronald Schettkat, 2007. "The Astonishing Regularity Of Service Employment Expansion," Metroeconomica, Wiley Blackwell, vol. 58(3), pages 413-435, July.
    5. Rita Asplund, 2005. "The Provision and Effects of Company Training: A Brief Review of the Literature," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 31, pages 47-73.

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    More about this item

    Keywords

    Frictional labor markets; human capital; changes in wage inequality;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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