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Title:Unwarranted wage changes and the return on capital PDF Logo
Authors:Katsimi, Margarita
Kalyvitis , Sarantis
Moutos, Thomas
Issue Date:2009
Series/Report no.:CESifo working paper 2804
Abstract:Casual empiricism suggests that unwarranted” wage changes, defined as the part of wage growth that is not explained by changes in labour productivity, are negatively associated with the return on capital. The main point of this paper is to show that unwarranted” wage changes have no causal effect on capital return. To this end, we show that standard theoretical models, in which unwarranted” wages changes and the return on capital are endogenously determined, do not necessarily predict a negative association between them. We then estimate aggregate net return on capital equations using panel data for 19 OECD countries for the period 1970-2000 in which we account for the endogeneity of unwarranted” wage changes by exploiting variations in institutional and labour market characteristics. We find that unwarranted” wage changes do not affect the return on capital. This result remains robust to alternative empirical specifications and to alternative definitions of profitability and unwarranted” wage changes. An implication of our findings is that standard calls for reforms aiming at wage moderation following the appearance of unwarranted” wage changes are not always justified.
Subjects:capital return
profits
unwarranted” wages
productivity
endogeneity
JEL:E24
E25
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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