Labor Market Institutions and Wage-led Growth: A Panel Cointegration Approach

Abstract

This study analyzes the long-term effect of labor market institutions, such as minimum wage and union density, on inequality, investment, growth, and consumption, by using data of the member countries of the Organization for Economic Co- operation and Development since the 1970s. Labor market institution variables are used to test arguments on wage-led growth theory.

Panel cointegration approach was used to investigate the long- term effect of these variables. Results of panel cointegration test show that variables of labor market institutions are not robustly correlated to macroeconomic outcomes in the long run. This condition is not in accordance with the findings of the proponents and critics of wage-led growth. No robust evidence exists to show that increasing minimum wage and union density, which are representative policies for wage-led growth, are correlated to inequality, labor income share, consumption, investment, or growth in the long run. Estimation results of this study suggest that the empirical basis of support and criticism for wage-led growth theory is weak.

Keywords: Wage-led growth, Minimum wage, Union density, Panel cointegration

JEL Classification: J08, J30, J51