The Role of Profits in Wage Determination: Evidence from Us Manufacturing

Board of Governors of the Federal Reserve System Finance and Economics Discussion Series Paper No 95-48

Posted: 25 Jun 1998

See all articles by Marcello M. Estevão

Marcello M. Estevão

International Monetary Fund (IMF) - Western Hemisphere Department

Stacey Tevlin

Board of Governors of the Federal Reserve System

Date Written: November 1995

Abstract

We estimate the effect of firms' profitability on wage determination for the American economy. Two standard bargaining models are used to illustrate the problems caused by the endogeneity of profits-per-worker in a real wage equation. The profit-sharing parameter can be identified withinstruments which shift demand. Using information from the input-output table, we create demand-shift variables for 63 4-digit sectors of the US manufacturing sector. The I.V. estimates show that profit-sharing is a relevant and widespread phenomenon. The elasticity of wages with respect to profits-per-worker is seven times as large as OLS estimates here and in previous papers. Sensitivity analysis of the profit-sharing parameter controlling for the extent of unionization and product market concentration reinforces our results.

JEL Classification: E24, J31, J50, L16

Suggested Citation

Estevao, Marcello M. and Tevlin, Stacey, The Role of Profits in Wage Determination: Evidence from Us Manufacturing (November 1995). Board of Governors of the Federal Reserve System Finance and Economics Discussion Series Paper No 95-48, Available at SSRN: https://ssrn.com/abstract=3064

Marcello M. Estevao (Contact Author)

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th St., NW
HQ1-10-115
Washington, DC 20431
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202-623-6038 (Phone)
202-589-6038 (Fax)

Stacey Tevlin

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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