Real Wage Growth Research Articles

New Dawn fades: Trade, labour and the Brexit exchange rate depreciation

This paper studies consequences of the large exchange rate depreciation occurring when the UK electorate unexpectedly voted to leave the European Union. Sterling plummeted, recording the biggest one-day depreciation of any of the world's four major currencies since Bretton Woods. The prospect of Brexit happening generated sizable differences in how much sterling depreciated against different currencies. Coupled with pre-referendum cross-country trade patterns, this generated variations in exchange rates facing businesses in different industries. The paper offers evidence of a cost shock from the prices of intermediate imports rising by more in higher depreciation industries, but with no revenue offset from exports. Workers were impacted by these increased cost pressures, not in terms of job loss but through relative real wage declines in higher depreciation, larger cost shock industries. This resulted in an aggregate fall in real wage growth of 3 to 3.6% cumulatively over the three years after the referendum.

Labor share decline across US manufacturing sectors: 1979–2019

ABSTRACT This paper studies the sectoral contributions to aggregate manufacturing labour share decline in the US between 1979 and 2019. Using the Log Mean Divisia index (LMDI) decomposition, the decline in the manufacturing sector’s labour share is decomposed into contributions from real wage growth, labour productivity growth, changes in employment shares, and relative prices arising from the constituent sectors across three business cycles. The primary findings of the paper suggest that the downward decoupling of real wages from labour productivity is the primary contributor to the labour share decline in manufacturing. Moreover, low labour share sectors (especially chemical products, food and beverage and tobacco products, and petroleum and coal products) have experienced an increase in their employment shares, contributing negatively to aggregate manufacturing labour share. This paper advances insights related to sectoral heterogeneity and possible mechanisms behind the decline in aggregate manufacturing labour share.

Society’s well-being and firm profitability. The case of Poland

Abstract The aim of the study is to examine the impact of society’s economic well-being determinants – above and beyond the firm-specific and macroeconomic determinants – on firm profitability in Poland. Based on stakeholder theory we hypothesized that the economic well-being of society can influence firm performance. Therefore, we included real wage and salary growth, internal migration, international migration, and natural increase variables in the regression models. We applied four models with different sets of variables using pooled ordinary least square regression, as well as fixed and random effects regressions with robust standard errors clustered at the firm level. The dataset covers the period from 2004 to 2021, comprising 5400 firm-year observations from Poland in the wholesale and retail trade sector. We found that firm profitability generally increases with higher inflation and exchange rate depreciation. Moreover, in models including society’s economic well-being variables, GDP growth is no longer a significant determinant of firm profitability. Most importantly, the study demonstrates a positive relationship between real wage and salary growth and firm profitability. We also found that international migration is negatively associated with firm profitability. Regarding natural increase, the study suggests that it has a positive effect on return on equity, but not on return on assets.

Wage–price spirals: what is the historical evidence?

AbstractHow common are wage–price spirals, and what has happened in their aftermath? We construct a new historical database of wage–price spirals—identified as episodes with consumer price inflation and average nominal wage growth rising jointly for at least a year—going back to the 1960s for a large sample of advanced economies. We find that only about a quarter of such episodes were followed by sustained accelerations in wages and prices. Instead, nominal wage growth and inflation tended to stabilize at a higher level on average, and then gradually revert, with real wage growth broadly unchanged. A decomposition of average wage dynamics during wage–price spiral episodes using a wage Phillips curve suggests that nominal wage growth normally stabilizes at levels consistent with observed inflation and labour market tightness. After historical episodes exhibiting rising inflation, falling real wages, and tightening labour markets—similar to what was observed in the early post‐COVID‐19 recovery in 2021—inflation tended to decline and nominal wage growth to rise, allowing real wages to gradually catch up. Our findings suggest that an acceleration of nominal wages against a backdrop of rising inflation does not necessarily signal that a persistent wage–price spiral dynamic is taking hold.

Educational choice, initial wage and wage growth

We study the effects of expected initial wages, expected wage growth, and observed and unobserved heterogeneity in the choice of college major in a sample of American college graduates. We propose a three-stage empirical model that relates future earnings to individual choices. In the first stage, starting from revealed choices, observed wages, and life-cycle wage profiles, we estimate the expectation on initial wages and wage growth from the individual point of view, where the panel structure of the data allows us to produce estimates corrected for self-selection bias. We find substantial differences in expected real wages and expected real wage growth between majors and that both characteristics of life cycle earnings influence major choice. Our parametric models show a strong correlation between salary trends and major choice, whereas semiparametric models yield less reliable results. We interpret our results as being consistent with agents being rational and as a validation for our estimation strategy based on counterfactual imputation.

Accounting for the Growth of Real Wages of U.S. Manufacturing Production Workers Since the Nineteenth Century

Accounting for the Growth of Real Wages of U.S. Manufacturing Production Workers Since the Nineteenth Century

The distributional impacts of transportation networks in China

We document that the quality of roads and railroads vary substantially over time and space in China, and neglecting these variations biases the distributional impacts of transportation networks. To account for quality differences, we construct a new panel dataset and approximate quality using the design speed of roads and railroads that varies by vintage, class, and terrain at the pixel level. We then build a dynamic spatial general equilibrium model for multiple modes, transportation routes, and forward-looking migration decisions. Our findings demonstrate that disregarding quality differences leads to a median bias of approximately 31% in estimating real wage growth rates at the prefecture level. Moreover, this bias is non-random and correlates with the initial conditions of the prefectures, resulting in significant errors when predicting the distributional effects of transportation networks.

Beyond state and market: the role of labor regimes and class dynamics in the East Asian miracle

While conventional wisdom focuses on the roles of the state and the market in achieving high growth in East Asian countries, this paper offers an account focused on class dynamics. First, the paper connects post-World War II class dynamics in Japan and South Korea to the distributional outcome, i.e., the gap between labor productivity growth and real wage growth. Statistical evidence and econometric tests suggest a positive relationship between a balance of power in favor of workers and a higher growth rate in output. Secondly, the paper puts forward a labor regime framework for explaining the connection between the class dynamics and the distributional outcome, and finds it to have played a central role by using historical data and an autoregressive distributed lag (ADL) model. We further analyze China’s economic growth and conclude by stressing the importance of class dynamics for better understanding growth and distribution in capitalist development.

Secular stagnation: a Classical–Marxian view

We study a model of secular stagnation, income and wealth distribution, and employment in the Classical–Marxian (CM) tradition, with the purpose of drawing a contrast with established Neoclassical accounts of the topic (Piketty 2014, Gordon 2015). In these explanations, which assume full employment of labor at all times, an exogenous reduction in the growth rate g increases the difference with the endogenous rate of return to capital r. The capital–income ratio rises and, if the elasticity of substitution is above one, the wage share falls. Our explanation does not presuppose full employment, and features a crucial tension between profit-driven capital accumulation and wage-driven labor-augmenting technical change: both these features are defining for CM economics and have been emphasized in recent heterodox macro literature. Institutional or technological shocks that lower the wage share initially foster capital accumulation – which is profit-driven – and increase wealth inequality. However, the effect on long-run growth is negative, because a reduction in the wage share lessens the incentives by firms to introduce labor-saving innovation, which is wage-driven. The capital–income ratio must rise in order to restore balanced growth and stabilize employment in the long run; and the increase in wealth inequality is permanent. The ultimate effect on long-run employment depends on the relative strength of the response of technical change versus real wage growth to labor market institutions: we identify a simple condition that delivers either a wage-led or a profit-led long-run employment regime. We then test the model using time-series data for the US (1960–2019): impulse responses from vector error-correction model (VECM) estimators lend support to the main predictions of our model, and point to the employment–population ratio being wage-led.

A preliminary review of India’s rural economic crisis: stagnant wages, piling debt and waning demand

ABSTRACT Aggregate growth numbers for India present a positive outlook as its economic momentum builds back and the economy displays full recovery following the Covid-19 crisis. It consequently reflects the Indian economy’s underlying resilience and ability to resuscitate its overall growth, driven by the rebound in private consumption despite the strong global headwinds and widening external deficits. However, its rural economy indicators point to a contradictory set of circumstances since this segment has been afflicted with persistently stagnant real wage growth in agricultural and non-agricultural occupations. It is further accompanied by the pileup of past debt for this section of the population, accumulated in the slowdown years of the post-demonetization phase, which has resulted in a continual weakening of rural consumption demand. The purpose of this research note is to provide a preliminary review of a deep-rooted crisis in India’s rural economy. This crisis is not merely an outcome of Covid-induced and inflationary factors, but rather dates back to the post-demonetization period. The data uncovers an enduring vicious spiral for the rural population group that not only questions the consumption stimulus to growth, but also imperils the resilience and economic prospects of the Indian economy.

법인세의 분배효과에 관한 연구

This study analyzes the effect of corporate income tax on income distribution in Korea. Studies on the economic effects of corporate income tax have mainly focused on investment and employment effects. This research trend is due to the prevailing idea that the investment effect of corporate income tax is decisive, employment and wages are determined incidentally, and that companies are merely conduits for distributing profits to shareholders. However, corporate income tax also affects the labor income share and household income distribution through changes in employment and wages, dividends, and internal reserve fund of a company. If corporate income tax cuts increase investment, but employment growth is weak and real wage growth rates falls short of labor productivity growth rates, the labor income share will decrease and household income inequality will widen. According to the results of the empirical research, the effects of corporate income tax rate on investment and employment are weak. The expanded investment is also capital-intensive, so the employment effect is not significant, and more the real wage increase does not keep up with labor productivity. As a result, a reduction in the effective corporate income tax rate lowers the labor income share and increases income inequality. Therefore, to increase the distribution effect of corporate income tax, corporate income tax should be reformed in a way that supports employment growth and real wage increases while including investment.

Simple mandates, monetary rules, and trend-inflation

AbstractA mandate framework is proposed for delegating monetary policy to an instrument-independent, but goal-dependent central bank that emphasizes simplicity in both the objectives entering the welfare criterion and those in the instrument rule. It consists of: (i) a simple quadratic loss function penalizing deviations from target variables; (ii) a welfare-optimized, Taylor-type log-linear nominal interest-rate rule with targets that match those in the loss function; (iii) a zero-lower-bound (ZLB) constraint on the nominal interest rate imposing a low unconditional probability of ZLB episodes; and (iv) a long-run inflation target. In an estimated New Keynesian model with these features, we find that for a quarterly probability of 5%, an optimal annual inflation target is close to 2%, weights for real variables in the loss function are small compared with inflation except for the real wage growth mandate and the optimized rules mimic a price-level rule.

Unemployment Rate Convergence in the Case of Turkey: A Regional Analysis within the Scope of Dollarization and Real Wage

The unemployment rate is a fundamental variable in the socioeconomic comparison between regions. Hence, it is included in the focus of regional economic policies. Regional policy sets are frequently used to eliminate regional unemployment differences. This situation raises discussions about the efficiency of the employment policies and questions whether regional unemployment rates tend to converge to national averages. Especially in economies with regional development differences and the labor market does not exhibit a homogeneous structure, the regional analysis of unemployment rates is becoming more critical. This paper analyses the convergence of unemployment rates with the panel data set, which includes 26 regions of Turkey and the period 2004-2020. It is investigated if regional macroeconomic interactions in Turkey make the labor market homogeneous. Besides, the effects of dollarization and real wage on the unemployment rate change are questioned. The study's findings indicate the presence of deterministic and stochastic β convergence. According to the unconditional and conditional β convergence analysis, the change in the unemployment rate depends on the initial value of the unemployment rate. The findings also show that if dollarization and real wage growth increase, unemployment rate growth also increases. σ convergence analysis also confirms the presence of unemployment rate convergence.

Problems of Unorganized Workers

Despite their significant contribution to the economy, only 6 % of unorganized workers avail any type of social security support. The growth of real wages of casual workers has also been relatively slow in the post-reform period. The workers of the unorganized sectors are the worst affected in the event of any kind of crisis. The fundamental socio-economic rights of domestic migrant workers were adversely affected during the lockdown, but the state response was not up to the expectation. Despite expansion in policy and programmes, India`s wage and social security system is quite vulnerable to unorganized workers. The people of our country know how to arrange the means of subsistence on their own, but if they get adequate government sponsored social assistance easily at the right time, then the difficulties related to their life will be greatly reduced.

Labor Skill, Trade and Capital Intensity, and the Fall of Manufacturing Real Wages: Panel Evidence from Mexican Industries

Abstract The paper studies the fall in manufacturing real wages that took place in Mexico after the China shock of 2001. It shows, first, that the wage reductions reflected a significant transmission of the China shock, plus a weak link between labor-productivity and real-wage growth; and second, that the weight of these two factors was conditioned by the skill level of workers and the trade and capital intensity of industries in Mexico. Thus, while the China shock hit harder medium and high-skilled workers in capital-intensive industries, the weak link between productivity and wage growth affected more the low-skilled in trade-intensive industries. Results come from the estimation of wage equations by skill level for an annual panel of 20 manufacturing industries at NAICS three-digit level, for different periods but focusing on 1996–2017 (the NAFTA period) and 2003–2017 (the post-China shock period).

Expecting Brexit

The Brexit vote precipitated the unraveling of the United Kingdom's membership in the world's deepest economic integration agreement. This article reviews evidence on the realized economic effects of Brexit. The 2016 Brexit referendum changed expectations about future UK–EU relations. Studying its consequences provides new insights regarding the economic impacts of news and uncertainty shocks. Voting for Brexit had large negative effects on the UK economy between 2016 and 2019, leading to higher import and consumer prices, lower investment, and slower real wage and GDP growth. However, at the aggregate level, there was little or no trade diversion away from the European Union, implying that many of the anticipated long-run effects of Brexit did not materialize before the new UK–EU trade relationship came into force in 2021.

Goodwin, Baumol & Lewis: How structural change can lead to inequality and stagnation

AbstractThis paper presents a labor‐constrained aggregate model of growth that explains stagnation and inequality as the result of structural change, which is defined as an exogenous increase in the employment share of low‐productivity services. Productivity growth is increasing in the labor share, reminiscent of induced technical change. Productivity and real wage growth further are assumed to respond negatively to structural change. We label the positive (negative) difference between these effects dominant Lewis (Baumol) dynamics. In steady state, and across two model variants, structural change leads to stagnation. Only the model version with Keynesian aggregate demand, dominant Lewis dynamics and a weak profit squeeze also exhibits a falling labor share, and hence conforms to key stylized facts.

How Firms and Experts View The Phillips Curve: Evidence from Individual and Aggregate Data from South Africa

ABSTRACT Heterogeneity is now a regular part of macroeconomic theory, but disaggregated data about firm expectations remain scarce. A survey of firms and financial analysts in South Africa provides forecasts of inflation and other macroeconomic variables. We estimate a variety of inflation and wage growth-based Phillips curves, which reflect differences in how firms and financial analysts view the link between inflation and real economic activity, as well as heterogeneity across firms. South African Phillips curves have become flatter, but backward-looking factors remain more relevant for firms. Rising real wage growth exceeds expected and past inflation and wage growth since the GFC.

The effects of German economic and political progress on the Sparkassen savings bank system

Since the end of World War II, the German banking system underwent many dramatic changes, however, the Sparkassen movement has remained in its current form since 1778. Through its localised structure, it has continued to act as a cornerstone of the German economy, accounting for over a third of banking assets since 1945. This system maintained a considerable presence throughout fragile political movements after the collapse of National Socialism, the reunification of the German state and the implementation of significant economic redevelopment such as the national ‘Hartz Reforms’. We test these inferences with evidence from the Sparkassen system’s influence on German savings, lending, and such relationships with real wage growth. We confirm that for much of the post-war era, savings banks have been more stable over time when placed in comparison with commercial banks. We identify a causal link between wages and balance sheets that exist in savings banks and not in commercial banks throughout the post-war era.

Tansu Chiller at the top of the political Olympus of the Turkish Republic: Is it easy to be the first?

The article analyzes two periods of stay in power in Turkey of the leader of the center-right True Path Party Tansu Chiller. These episodes are interesting as the first experience of a female leader in the highest state posts in the Republic of Turkey. During the first episode, T.Chiller headed the government, during the second, as Deputy Prime Minister, she represented her party in the coalition government formed jointly with the pro-Islamic Welfare Party. Thus, in this case the experience of a woman leader in a high state post was combined with the initial testing of joint governing with the party of political Islam. From the point of view of the results achieved, both periods turned out to be quite contradictory. Having failed to reverse some previously established populist trends in economic policy, doomed in the long term, in particular, having failed to direct the country's economy to financial liberalization, Chiller continued to follow the path of achieving short-term goals, trying to protect the power position of her party at the current moment. As a result, in 1994, financial crisis prepared by the excessive implementation of a stimulating fiscal policy since the late 1980s broke out in Turkey. Being in coalition with Necmetin Erbakan, T.Chiller supported in fact a departure from the post-crisis stabilization program and return to the policy of real wage growth. Thus, during the reign of Chiller, the expected update in the country's economic policy did not occur, but this reign should not be emphasized as quite unsuccessful. Rather, it was carried out in accordance with previously established traditions and represented a continuation of the game according to the previously established rules.