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Higher wages and capital intensity: a closer look

  • Matti Viren

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    (Department of Economics, University of Turku)

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    This paper focuses on the relationship between higher wages and capital intensity. The relationship itself is by no means a novel finding but we try to provide a meaningful theoretical explanation for the relationship and empirical evidence on its exact nature. Our explanation is the outcome of the wage bargaining process in the case of capital-intensive companies. They are more vulnerable to strike threat than companies that have a small capital stock and thus they may more easily give in for union wage demand. In other words, the bargaining power of unions is related to the capital-labor ratio. This paper provides some tests for these hypotheses with an extensive panel data for Finnish unincorporated enterprises and companies. The results show the relationship between higher wages and capital intensity and very strong and it applies to all sorts of companies and, finally, and it is consistent with the wage bargaining hypothesis.

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    File URL: http://www.ace-economics.fi/kuvat/ACE13%20Viren%20valmis.pdf
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    Paper provided by Aboa Centre for Economics in its series Discussion Papers with number 13.

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    Length: 21
    Date of creation: Dec 2006
    Date of revision:
    Handle: RePEc:tkk:dpaper:dp13
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    1. Abowd, J.M. & Kramarz, F. & Margolis, D.N., 1995. "High-Wage Workers and High-Wage Firms," Cahiers de recherche 9503, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    2. Chris Papageorgiou & Fidel Pérez Sebastián & John Duffy, 2002. "Capital-Skill Complementarity? Evidence From A Panel Of Countries," Working Papers. Serie AD 2002-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    3. Miller, Paul & Mulvey, Charles, 1996. "Unions, Firm Size and Wages," The Economic Record, The Economic Society of Australia, vol. 72(217), pages 138-53, June.
    4. J Konings & Patrick Paul Walsh, 1993. "Evidence of Efficiency Wage Payments in UK Firm Level Panel Data," CEP Discussion Papers dp0138, Centre for Economic Performance, LSE.
    5. Devereux, Michael B. & Lockwood, Ben, 1991. "Trade unions, non-binding wage agreements, and capital accumulation," European Economic Review, Elsevier, vol. 35(7), pages 1411-1426, October.
    6. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
    7. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
    8. Samuel Bentolila & Gilles Saint Paul, 1999. "Explaining movements in the labor share," Economics Working Papers 374, Department of Economics and Business, Universitat Pompeu Fabra.
    9. Surendra Gera & Gilles Grenier, 1994. "Interindustry Wage Differentials and Efficiency Wages: Some Canadian Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 27(1), pages 81-100, February.
    10. Edward E. Leamer, 1999. "Effort, Wages, and the International Division of Labor," Journal of Political Economy, University of Chicago Press, vol. 107(6), pages 1127-1162, December.
    11. Graziella Bertocchi, 2003. "Labor Market Institutions, International Capital Mobility, and the Persistence of Underdevelopment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 637-650, July.
    12. Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, vol. 52(2), pages 449-60, March.
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