'Excessive' wages and the return on capital

Abstract

Received wisdom suggests that "excessive" wages, defined as the part of real wages that do not follow labour productivity developments, are adversely associated with the return on capital. This paper argues that excessive wages and profits are better thought as responses to changes in the economic, political and institutional environment and there is no a priori reason for a negative relationship between them. We thus investigate whether there is a causal effect of excessive wages on capital return using aggregate panel data for 19 OECD countries for the period 1970-2000. We account for the endogeneity of excessive wages by exploiting variations in institutional and labour market characteristics. Our main finding is that excessive wages do not affect the return on capital. This result remains robust to alternative empirical specifications and to alternative definitions of profitability and excessive wages, and questions the standard advice by international economic organizations on wage moderation. JEL classification: E24, E25

Rates of return on capital across the world: are they converging?

“…The 'labour-share squeeze' of the 1980s, 1990s and 2000s has created favourable conditions for the long-term increase in the profitability of capital. A large number of studies done in both mainstream and heterodox tradition (Duca, 1997;Glyn, 1997;Poterba, 1998;Wolff, 2003;European Central Bank, 2004;Duménil and Levy, 2011;Cette et al, 2011, Katsimi et al, 2012Basu and Vasudevan, 2013) confirm the increase of profit rates in most developed countries between the early 1980s and the start of the global recession of 2008-9. However much less is known about the levels and trends of the return on capital (ROC) in developing and post-communist, transition economies.…”

Markups and Fiscal Policy: Analytical Framework and an Empirical Investigation

“…6 This assumption deviates from the Cobb-Douglas production function and the constant elasticity of substitution between labor and capital framework. See, for example, Booth (1995), Rowthorn (1999), and Katsimi (2012). 7 For the proof, see Appendix 2.…”

“…The elasticity of substitution and its relation between wages and profit. From Summers (1988), Katsimi et al (2012), the maximum profit Π* of a representative firm is given by the following expression:…”