'Unwarranted' Wage Changes and the Return on Capital

41 Pages Posted: 5 Oct 2009

See all articles by Margarita Katsimi

Margarita Katsimi

Athens University of Economics and Business - Department of International and European Economic Studies; CESifo (Center for Economic Studies and Ifo Institute)

Sarantis C. Kalyvitis

Athens University of Economics and Business - Department of International and European Economic Studies

Thomas Moutos

Athens University of Economics and Business - Department of International and European Economic Studies; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: September 2009

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.

Keywords: capital return, profits, “unwarranted” wages, productivity, endogeneity

JEL Classification: E24, E25

Suggested Citation

Katsimi, Margarita and Kalyvitis, Sarantis C. and Moutos, Thomas, 'Unwarranted' Wage Changes and the Return on Capital (September 2009). CESifo Working Paper Series No. 2804, Available at SSRN: https://ssrn.com/abstract=1481148 or http://dx.doi.org/10.2139/ssrn.1481148

Margarita Katsimi (Contact Author)

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

76, Patision Avenue
GR-10434 Athens
Greece

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Sarantis C. Kalyvitis

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

Patission Str 76
GR-10434 Athens
Greece

Thomas Moutos

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

76 Patission Street
GR-10434 Athens
Greece

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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