Capital-Skill Complementarity and Labor Earnings

Abstract

One of the continuing attempted qualifications of neoclassical wage determination theory has been the monopoly wage hypothesis. Firms in industries characterized by high concentration ratios and extensive unionization have been observed to exhibit higher than average hourly earnings [1, 2, 4, 8, 11, 16, and 18]. According to the monopoly wage hypothesis, to the extent that firms enjoy product market rents, these rents are shared with labor factors of production. In a neoclassical reformulation of wage determination, Weiss [20] demonstrated that wages in concentrated industries are relatively high because average labor quality is superior in those industries. Workers receive only their opportunity costs and acquire no rents due to the product market circumstances of their employers. Concentration ceases to be a factor in wage determination? Weiss provides no explanation, however, as to why concentrated industries use superior quality labor. The proposition examined here is that the observed relations among concentration, labor quality, and wages are caused by the simultaneous impact which required capital investment has on both concentration and the quality of labor inputs. There is a positive correlation between capital inputs per plant and concentration ratios. The link between capital investments and labor quality is provided by a capital-skill complementarity (CSC) hypothesis which states that the elasticity of substitution of capital for unskilled labor is greater than the elasticity of substitution of capital for skilled labor. Assuming that the CSC hypothesis is true, and given the condition that skill and wages are positively related, then the average wage rate for an occupation directly associated with the capital investments should rise as the value of depreciable assets per plant increases. The relation should be less strong for those occupations not as directly associated with the capital inputs. Insofar as the absolute capital requirement notion and the CSC hypothesis are correct, then the link between concentration levels and average wage rates across industries is the level of invested capital per establishment.