'Unwarranted' Wage Changes and the Return on Capital
41 Pages Posted: 5 Oct 2009
Date Written: September 2009
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.
Keywords: capital return, profits, “unwarranted” wages, productivity, endogeneity
JEL Classification: E24, E25
Suggested Citation: Suggested Citation