Abstract
AbstractThe Walrasian theory of labor market equilibrium predicts that in the absence of any market frictions, workers earn a wage rate equal to their marginal productivity. In this paper, based on the neoclassical tradition, the authors define the ratio of the marginal product of labor to real wages as the Pigouvian exploitation rate and then construct a panel dataset of this specific wage-productivity gap for the manufacturing sector in OECD economies. Next, they investigate its relationship with the unemployment rate along with various other variables such as the government taxation, capital expansion, unionization, inflation. Their findings suggest that the wage-productivity gap gives a robust and significantly positive response to shocks to unemployment rate and a negative response to shocks to unionization.
Highlights
In the absence of any market distortions, perfect competition in the labor market and profit maximizing behaviour of firms under constant returns to scale imply that real wages should be equal marginal product of labor (MPL)
In Elgin and Kuzubas (2012) we investigate the evolution of the relationship between real wages and marginal product of labor in Turkish manufacturing sector and find that there is a significant gap between these two variables
We use panel-data vector autoregression (VAR) methodology which fits the purpose of this paper well as the theoretical predictions indicate a two-way causation between wage-productivity gap and unemployment rate
Summary
In the absence of any market distortions, perfect competition in the labor market and profit maximizing behaviour of firms under constant returns to scale imply that real wages should be equal marginal product of labor (MPL). When competitive firms take product and factor prices as given and maximize their profit function, it is immediate from the profit maximization of the firm that real wages should equal marginal product of labor. This theoretical result is not supported empirically for various economies. Aiming to generalize this result, in this paper we conduct this analysis using a cross-country panel data set consisting of 31 countries and over a time span of 50 years between 1960 and 2009 and investigate the interaction of the wageproductivity gap with various variables. Our empirical results indicate that the wage-productivity gap gives a robust and significantly positive response to shocks to unemployment and negative response to shocks to unionisation
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