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Capital Deepening and Wage Differentials: Germany vs. US

Author

Listed:
  • Koeniger, Winfried

    (University of St. Gallen)

  • Leonardi, Marco

    (University of Milan)

Abstract

Capital deepening may affect the evolution of the wage differential between skilled and unskilled workers differently in countries with different labor market institutions. If labor market institutions raise the relative wage of unskilled workers in Germany, firms have incentives to invest relatively more into capital equipment complementary to unskilled workers. Instead in the US, where wage-compressing institutions are weaker, firms invest more in high-skilled workers. We provide evidence consistent with this view based on an industry panel for West Germany and the US between the 1970s and 1990s. We show that capital equipment per worker is less positively associated with the wage differential in West Germany than in the US. This descriptive evidence is robust to many alternative measures for capital and skills. Our estimates imply that capital deepening in Germany in the 1980s is associated with a reduction in the wage differential of about 10-20% in most industries. In the US instead, capital deepening is associated with an increase of the wage differential between 5 and 15% in most industries.

Suggested Citation

  • Koeniger, Winfried & Leonardi, Marco, 2006. "Capital Deepening and Wage Differentials: Germany vs. US," IZA Discussion Papers 2065, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2065
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    Cited by:

    1. Lorenzo Cappellari & Carlo Dell’Aringa & Marco Leonardi, 2012. "Temporary Employment, Job Flows and Productivity: A Tale of Two Reforms," Economic Journal, Royal Economic Society, vol. 122(562), pages 188-215, August.
    2. Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2016. "Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy," Economic Journal, Royal Economic Society, vol. 126(595), pages 1798-1822, September.
    3. Daniel Felsenstein, 2011. "Capital Deepening and Regional Inequality: An Empirical Analysis (refereed paper)," ERSA conference papers ersa10p759, European Regional Science Association.
    4. Gordon, Robert J. & Dew-Becker, Ian, 2008. "Controversies about the Rise in American Inequality: A Survey," CEPR Discussion Papers 6817, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    capital deepening; skill premium; wage floors; institutions;
    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
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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