Productivity, private and public capital, and real wage in the US

Abstract

This paper examines the relationship between real wages and productivity in the United States from 1948–90, by including in the measure of productivity the impact of public capital as well as private capital. The results confirm recent studies that have indicated that when the private and public capital stock is controlled for, real wage is countercyclical, and validate diminishing returns to labour, positive returns to public capital and a procyclical effect of capacity utilization on real wage. Further, the issue of spurious regression bias that arises when variables are nonstationary was addressed, and long run relationships were then estimated. Results establish a long-run relationship between productivity, real wage, the employment to capital ratio, and public to private capital ratio. Using the statistical estimates herein, if the public capital stock had remained at the historical 1948–65 ratio, rather than declining, productivity would have been between 2.4 and 2.9 percentage points higher and real wages would have been between 2 to 2.8 percentage points higher, ceteris paribus.