Constant Wage Research Articles

The Cobb-Douglas Production Function and the Old Bowley's Law

Bowley's law, also referred to as the law of the constant wage share, was a noteworthy empirical finding in economics, suggesting that a nation's wage share tended to remain stable over time, as observed through most of the 20th century. The wage share represents the proportion of a country's economic output that is distributed to employees as compensation for their labor, usually in the form of wages. The term ''Bowley's law'' was coined in 1964 by Paul Samuelson, the first American laureate of the Nobel memorial prize in economic sciences. He attributed this principle to Sir Arthur Bowley, an English economist, mathematician, and statistician. In this paper, we introduce a mathematical model derived from data for the American economy, originally employed by Cobb and Douglas in 1928 to validate the renowned Cobb-Douglas production function. We utilize symmetry methods, particularly those developed by Peter Olver, to elucidate the validity of Bowley's law within our model's framework. By employing these advanced mathematical techniques, our objective is to elucidate the factors contributing to the stability of the wage share over time. We demonstrate that the validity of both Bowley's law and the Cobb-Douglas production function arises from the robust growth of an economy, characterized by expansion in capital, labor, and production, which can be approximated by an exponential function. Through our analysis, we aim to offer valuable insights into the underlying mechanisms that support Bowley's law and its implications for comprehending income distribution patterns in economies.

Product Differentiation and Trade

Abstract This paper analyzes the impacts of product differentiation in general oligopolistic equilibrium with trade. With constant wages, when product differentiation increases, the extensive margins of home and foreign exports decrease, and the domestic and foreign scopes of variety in each industry increase unambiguously. However, the impact of product differentiation on the labor requirement of each firm is mixed. In general equilibrium, an increment of product differentiation increases the wage rate unambiguously if the total variety of goods is large enough in all industry. However, if all firms are single-product ones, an increment of product differentiation increases the wage rate unambiguously in general equilibrium.

Discounting of employment opportunities with urine drug testing requirements in opioid users enrolled in the Therapeutic Workplace.

The evidence-based Therapeutic Workplace (TWP) is a promising employment-based treatment where access to work is contingent on objective evidence of abstinence from drugs. TWP is sometimes criticized for requiring individuals who use drugs to voluntarily enroll in a program requiring urine drug testing. This experiment was conducted to assess whether urine drug testing as a condition of employment decreases the value of employment opportunities and to what degree. Participants were unemployed, DSM-IV opioid-dependent, and enrolled in TWP. Participants completed discounting tasks assessing preference for a hypothetical job paying a constant wage that did not require urine drug testing and a job that paid a variable wage but required drug testing. The primary outcome was 'job value' operationalized as percentage wage difference to accept a job requiring urine drug testing. Percent wage difference to accept a job that required urine testing was analyzed using GEE. Results revealed a significant main effect of recent drug use (χ2(1) = 10.07, p < .01). Most participants were willing to accept a urine drug-testing job across wages similar non-drug testing jobs. Participants reporting recent cocaine or heroin use were less likely to choose urine drug-testing employment.

Why does field of study–occupation mismatch have no effect on wages in Turkish labour markets?

ABSTRACT The Turkish labour market has undergone remarkable changes in the last two decades. An important development is the rising number of university graduates: The aim of this study is to explore whether the Turkish economy has undergone sufficient technological progress to favour more skilled workers, by analysing the effects of skill mismatch on wages in the Turkish labour market. Using three recent Labour Force Surveys from 2014 to 2016, we show that a significant proportion of university graduates are overeducated for their jobs. This descriptive finding in itself would not necessarily indicate a fundamental education-specific mismatch problem, but a transition in labour markets following rapid structural shifts in a developing economy. However, our findings also show that the most suitable jobs for university graduates may not require specialization in any field of study in Turkey. Both findings imply that supply and demand for skilled workers may be in short-term disequilibrium leading to surpluses in different skills in Turkish labour markets consistent with the recent evidence for constant relative real wages for skilled workers.

Factors Affecting Sectoral Employment in Nigeria during the Period of Growth (1981-2014)

The Nigerian economy was characterised with high levels of unemployment during the periods of substantial growth between 1981 and 2014. Various economists described the growth regime as “jobless”. Sectoral differences were, also, observed with regard to their job absorptive capacities. Time series secondary data covering 1981 to 2014 on the rebased Gross Domestic Product (GDP) and sectoral Gross Value Added (GVA) at 2010 constant basic prices, employment, wage rate, inflation rate and interest rate were collected from the National Bureau of Statistics (NBS) and Central Bank of Nigeria (CBN). The variables were extracted from statutory publications of the institutions, collated and summarised into a table of data. The unit root test was carried out to test for stationarity of variables. The data was analysed using VECM at α 0.05. The result shows that wage rate, inflation rate, and interest rate all affected employment negatively across sectors. Gross Value added affected employment positively in the non-agricultural sectors, but negatively in the agricultural sectors. Inter-sectoral linkages and dependences also peculiarly affected job creation positively or negatively.

Growth and development with dual labor markets

AbstractThis paper develops a formal growth model in an open economy environment that captures dual labour market characteristics. The mechanism involves economic growth driven by capital accumulation in a country with a Lewisian labour market leading to increasing labour participation at a near constant wage. The model shows that surplus labour plays a critical role in explaining different economic growth paths and structural changes in both developing and developed countries.

Voting over redistribution in the Meltzer–Richard model under interdependent labor inputs

This paper extends the median voter result of Meltzer and Richard (1981) to the case where a labor economy has any constant returns to scale production function under quasilinear preferences with constant wage elasticity. Average productivities of the different labor inputs depend on their relative abundance in the economy. Agents are heterogeneous due to their labor type and (given type) due to their relative efficiency. They vote over income tax rates which in turn dictate the level of redistribution. The paper shows that preferences over tax rates are single-peaked and hence the median voter theorem applies. This framework connects the scarcity of inputs to the most preferred tax rates.

Wage Increases and the Dynamics of Reciprocity

We investigate how workers’ performance is affected by the timing of wages in a real-effort experiment. In all treatments, agents earn the same wage sum, but wage increases are distributed differently over time. We find that agents work harder under increasing wage profiles if they do not know these profiles in advance. A profile that continuously increases wages by small amounts raises performance by about 15% relative to a constant wage. The effort reactions can be organized by a model in which agents reciprocally respond to wage impulses, comparing wages to an adaptive reference standard determined by the previous wage.

Career concerns with exponential learning

This paper analyzes the impact of market structure on career concerns. Effort increases the probability that a skilled agent achieves a one-time breakthrough. Wages are based on assessed ability and on expected output. For any wage, the agent works too little, too late. Under short-term contracts, effort and wages are single-peaked with seniority, due to the strategic substitutability of effort levels at different times. Both delay and underprovision of effort worsen if effort is observable. Commitment to wages by competing firms mitigates these inefficiencies. In that case, the optimal contract features piecewise constant wages and severance pay.

The Transformation of Values into Prices of Production in Marx’s Scheme of Expanded Reproduction

This paper analyzes the formation of a general rate of profit and the subsequent prices of production in the context of Marx’s two-sector scheme of expanded reproduction. We show that a consistent solution of the transformation problem can be derived by incorporating the original transformation procedure into the inter-temporal equilibrium framework provided by the scheme of accumulation. Previous solutions for the special case of simple reproduction are also examined, and it is shown that all these solutions rest on the restrictive assumption of constant wage rates.

How Do Agents React to Dynamic Wage Increases? An Experimental Study

We investigate how workers' performance is affected by the timing of wages in a real-effort experiment. In all treatments agents earn the same wage sum but wage increases are distributed differently over time. We find that agents work harder under increasing wage profiles if they do not know these profiles in advance. A profile that continuously increases wages by small amounts raises performance by about 15% relative to a constant wage. The effort reactions can be organized by a model in which agents reciprocally respond to wage impulses, comparing wages to an adaptive reference standard determined by the previous wage.

How Credible Are Shrinking Wage Elasticities of Married Women Labour Supply?

This paper delves into the well-known phenomenon of shrinking wage elasticities for married women in the US over recent decades. The results of a novel model experimental approach via sample data ordering unveil considerable heterogeneity across different wage groups. Yet, surprisingly constant wage elasticity estimates are maintained within certain wage groups over time. In addition to those constant wage elasticity estimates, we find that the composition of working women into different wage groups has changed considerably, resulting in shrinking wage elasticity estimates at the aggregate level. These findings would be impossible to obtain had we not dismantled and discarded the instrumental variable estimation route.

Estimating the income loss of disabled individuals: the case of Spain

In this paper, we present a theoretical model along with an empirical model to identify the effects of disability on wages. From the theoretical model, we derive the hypothesis that only the temporary component of the wage gap, which is due to assimilation costs, will diminish over time, whereas the permanent element, which is due to the productivity loss after the disabling condition, will in fact persist. We test this theoretical hypothesis using an exogenous disability shock (accident) and combine propensity score matching with a difference-in-differences method to account for observed and unobserved time-constant differences. In all our specifications, we find that the reduction in wages for the disabled is between 274 and 308 euros per month, and this represents 19–22 % of the average wage of a disabled worker. This gap, however, is more than offset when we count disability benefits and wages collectively as income. As predicted in the theoretical model, we observe that around 40 % of the initial wage gap between disabled and non-disabled individuals is reversed once the transitory drop in productivity disappears. However, we also observe a constant wage gap that remains over time and that corresponds to the permanent fall in productivity predicted by the theoretical model (60 % of the initial wage gap).

Inflation and Speculation in a Dynamic Macroeconomic Model

We study a monetary version of the Keen model by merging two alternative extensions, namely the addition of a dynamic price level and the introduction of speculation. We recall and study old and new equilibria, together with their local stability analysis. This includes a state of recession associated with a deflationary regime and characterized by falling employment but constant wage shares, with or without an accompanying debt crisis.

GETTING IT DONE: DYNAMIC INCENTIVES TO COMPLETE A PROJECT

A principal wants an agent to complete a project. The agent undertakes unobservable effort, which affects in each period the probability that the project is completed. We characterize the contracts that the principal sets, with and without commitment. With full commitment, the contract involves the agent's value and wage declining over time, in order to give the agent incentives to exert effort. The best sequentially rational equilibrium for the principal also involves the agent's wage declining over time, while the worst sequentially rational equilibrium for the principal has a constant wage (and is in fact the unique stationary equilibrium). The best (weakly) renegotiation-proof equilibrium for the principal is achieved by a constant wage that maximizes the principal's payoff, conditional on wages being constant. We compare these solutions to the efficient outcome.

Career Concerns and Market Structure

This paper analyzes the impact of market structure on career concerns. Effort increases the probability that a skilled agent achieves a one-time breakthrough. Wages are based on assessed ability and on expected output. For any wage, the agent works too little, too late. Under short-term contracts, effort and wages are single-peaked with seniority, due to the strategic substitutability of effort levels at different times. Both delay and underprovision of effort worsen if effort is observable. Commitment to wages by competing firms mitigates these inefficiencies. In that case, the optimal contract features piecewise constant wages and severance pay.

Bonus Payments versus Efficiency Wages in the Repeated Principal-Agent Model with Subjective Evaluations

We study an infinitely repeated principal-agent model with subjective evaluations. We compare the surplus in efficiency-wage equilibria and in bonus-payments equilibria. The agent receives a constant wage and is motivated by the threat of dismissal in efficiency-wage equilibria. The agent receives a bonus and quits the relationship after disagreements between his self-evaluation and the principal's performance appraisal in bonus-payments equilibria. We construct a class of equilibria with bonus payments that approach efficiency as patience increases. In contrast, payoffs from efficiency-wage equilibria are bounded away from the Pareto-payoff frontier for any discount factor. (JEL D82, J33, J41)

The Impacts of an Ageing Population on Savings and Pension Schemes in a World with Uncertain Life Expectancy

In the model world with overlapping generations and uncertain life expectancy individuals can live for a maximum of two periods. Only one part of each generation survives the work-ing phase and lives to enjoy retirement. The other part dies after the first half of life. Within this framework it is possible to examine the influences of an ageing population on individual saving behaviour as well as social security systems.This article analyses the determination of individual savings and per-capita consumption by presupposing constant wage and interest rates. We continue to examine the influence of dif-ferent pension schemes on individual saving behaviour. It is shown that the introduction of a pension scheme leads to drop in overall per-capita savings regardless of what type of pension scheme - pay-as-you-go or fully funded. Furthermore the influences of a demographic change in the form of increasing life expectancy on individual saving behaviour and pension schemes are examined.

Labor force participation and pair-wise efficient contracts with search and bargaining

A “constant” wage is pair-wise inefficient in a standard search model when workers endogenously separate from employment. We derive a pair-wise efficient employment contract that involves workers paying a hiring fee (or bond) upon the formation of a match. We estimate the constant wage and pair-wise efficient contract assuming the hiring fee is unobservable, and find evidence to reject the pair-wise efficient contract in favor of the constant wage rule. A counterfactual experiment reveals the current level of labor force participation to be 9.6% below the efficient level, and a structural shift to the pair-wise efficient contract improves welfare by roughly 3.5%.

Estimating the Income Loss of Disabled Individuals: The Case of Spain

In this paper, we present both a theoretical and an empirical model in order to identify the effects of disability on wages. In the theoretical model we assume that the wage gap of a disabled worker depends on a permanent and a transitory productivity gap and the model predicts that the wage gap will be lower after gaining some work experience in the new job. We test this theoretical hypothesis using an exogenous health shock and matching methods associated with treatment effect techniques for policy evaluation. In all our specifications, we find that the reduction of the wage for the disabled is between 293 and 342 euros per month expressed in constant terms at 2010 prices (21-24% of the average wage of disabled workers) but this reduction is more than offset when we take into account both the disability benefits and the wage. As predicted in the theoretical model, we observe that the pay gap between the disabled and the non-disabled individuals falls over time once the transitory drop in productivity is disappearing. However, we observe a constant wage gap that remains over time and that corresponds to the permanent fall in productivity predicted by the theoretical model.