The Wage-Productivity Gap Revisited: Is the Labour Share Neutral to Employment?

43 Pages Posted: 2 Aug 2010  

Marika Karanassou

University of London, Queen Mary - Department of Economics ; Institute for the Study of Labor (IZA)

Hector Sala

Autonomous University of Barcelona - Department of Applied Economics; IZA Institute of Labor Economics

Abstract

This paper challenges the prevailing view of the neutrality of the labour income share to labour demand, and investigates its impact on the evolution of employment. Whilst maintaining the assumption of a unitary long-run elasticity of wages with respect to productivity, we demonstrate that productivity growth affects the labour share in the long run due to frictional growth (that is, the interplay of wage dynamics and productivity growth). In the light of this result, we consider a stylised labour demand equation and show that the labour share is a driving force of employment. We substantiate our analytical exposition by providing empirical models of wage setting and employment equations for France, Germany, Italy, Japan, Spain, the UK, and the US over the 1960-2008 period. Our findings show that the time-varying labour share of these countries has significantly influenced their employment trajectories across decades. This indicates that the evolution of the labour income share (or, equivalently, the wage-productivity gap) deserves the attention of policy makers.

Keywords: wages, productivity, labour income share, employment

JEL Classification: E24, E25, O47

Suggested Citation

Karanassou, Marika and Sala, Hector, The Wage-Productivity Gap Revisited: Is the Labour Share Neutral to Employment?. IZA Discussion Paper No. 5092. Available at SSRN: https://ssrn.com/abstract=1651717

Marika Karanassou (Contact Author)

University of London, Queen Mary - Department of Economics ( email )

Mile End Road
London, E1 4NS
United Kingdom
+44 20 7975 5090 (Phone)
+44 20 7983 3580 (Fax)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Hector Sala Lorda

Autonomous University of Barcelona - Department of Applied Economics ( email )

Departament d'Economia Aplicada
Bellaterra, 08193
Spain
+34 93 581 2779 (Phone)
+34 93 581 2292 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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