Determinants of sectoral average wage growth rates in a specific factors model with international capital movements: the case of Cobb-Douglas production functions

Abstract

The cost-minimization part of a specific factors model with perfect capital movements and both perfect and imperfect competition is used here to explain the growth rate of wages as a function of technical change, terms of trade changes, interest rate changes and the growth rate of the labour supply. Our estimation of the perfect competition model for 67 combinations of countries and sectors yields the result that technical change explains a higher percentage of wage growth than changes in the terms of trade do before the 1980s. From the 1980s onwards international trade is slightly more influential than technical progress. Much more important than these two are changes in the sector specific labour supply in all countries but the UK. In the UK terms of trade changes matter most. However, since we cannot exclude increasing returns, a model with imperfect competition is also estimated. Besides a confirmation of the strong results for labour, evidence of increasing returns is found in especially the Netherlands and the US. Almost no evidence hereof is found in Germany and the UK. Finally we consider policy conclusions.