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Excessive Wages and the Return on Capital

Thomas Moutos (), Sarantis Kalyvitis () and Margarita Katsimi

No 1104, DEOS Working Papers from Athens University of Economics and Business

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.

Keywords: capital return; �excessive� wages; productivity; endogeneity. (search for similar items in EconPapers)
JEL-codes: E24 E25 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab and nep-mac
Date: 2011-01-10
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Journal Article: 'Excessive' wages and the return on capital (2012) Downloads
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