The Effects of Wage Volatility on Growth

32 Pages Posted: 25 Sep 2011

See all articles by Michael Jetter

Michael Jetter

University of Western Australia; IZA

Alex Nikolsko‐Rzhevskyy

Lehigh University - Business School

William T. Smith

University of Memphis - Economics

Date Written: September 19, 2011

Abstract

This paper develops a theoretical model that identifies the relationship between the volatility of private sector wages and growth. The model suggests two distinct channels in which wage volatility affects growth: a positive direct way and a negative indirect way. The direct effect stems from precautionary savings, whereas the indirect effect works through the mediating role of government size. Our empirical part of applying a 3SLS approach to a panel of 20 high-income OECD countries provides strong evidence for the existence of both effects. Various robustness tests confirm the results. In addition, our data shows that the indirect effect is stronger in smaller countries with a population under 10 million people, whereas the direct effect is more significant in bigger countries.

Keywords: Growth, Volatility, Government Size, Wages

JEL Classification: C33, E20, O40

Suggested Citation

Jetter, Michael and Nikolsko-Rzhevskyy, Alex and Smith, William T., The Effects of Wage Volatility on Growth (September 19, 2011). Available at SSRN: https://ssrn.com/abstract=1933304 or http://dx.doi.org/10.2139/ssrn.1933304

Michael Jetter (Contact Author)

University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
AUSTRALIA

Alex Nikolsko-Rzhevskyy

Lehigh University - Business School ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

HOME PAGE: http://www.nikolsko-rzhevskyy.com

William T. Smith

University of Memphis - Economics ( email )

Department of Economics
Memphis, TN 38152
United States
(901) 678-3675 (Phone)

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