Capital deepening and wage differentials: Germany versus US

Abstract

"In flexible labour markets, capital increases the productivity of skilled workers more than that of unskilled workers, and in the US faster investment is associated with wider wage inequality. But labour market institutions that keep unskilled workers' wages high also imply that firms may find it profitable to invest so as to boost those workers' productivity. Our empirical analysis based on industry-level data confirms that a higher capital intensity in Germany is associated with smaller wage differentials and with a larger share of unskilled workers in the labour costs. Changes in capital-labour ratios during the 1980s reduced wage differentials by 5-8% in German industries, while in the US capital deepening in such industries as machinery and retail was accompanied by an increase of wage differentials larger than 7%." Copyright (c) CEPR, CES, MSH, 2007.

The Effect of Employment Protection Legislation and Financial Market Imperfections on Investment: Evidence from a Firm-Level Panel of EU Countries

“…More EPL means that labour is more costly and when adopting new technologies firms will choose more capital intensive technologies (see among others Caballero and Hammour, 1998, Alesina and Zeira, 2006and Koeniger and Leonardi, 2007.…”

Human capital, employment protection and growth in Europe

“…6 Acemoglu (2003) shows that regulations in the labour market, by compressing the wage distribution, might induce firms to invest more heavily in technologies that are complementary to low skilled workers. The increased productivity of low skilled labour could therefore reduce the relative importance of skill biased technical change for countries with heavily regulated labour markets, and this might again cause slower growth in human capital intensive sectors in countries with such labour markets (see also Koeniger and Leonardi, 2007). 7 It should be noted that the negative and significant correlation between personal computer adoption rates and EPL reported in Fig.…”

Technology and labor regulations: theory and evidence

“…See Davis and Haltwinger (1991), Katz and Murphy (1992), Bound and Johnson (1992), Juhn, Murphy, andPierce (1993), Berman, Bound andGrilliches (1994), Greenwood and Yorukoglu (1997), Acemoglu (1998Acemoglu ( , 2003, and Berman, Bound and Machin (1998). 5 This possibility is also raised in Koeniger and Leonardi (2007). 6 The effect of such labor institutions and macroeconomic shocks on persistent unemployment is analyzed by Blanchard and Wolfers (2000), Lazear (1990) and Blanchard, Cohen and Nouveau (2005).…”

“…See also Autor, Kerr and Kugler (2007) and Beaudry and Green (2003). Acemoglu (2003) and Koeniger and Leonardi (2007) offer a different explanation to labor-capital substitution through distortions to investment by labor regulation.…”