Capital Deepening and Wage Differentials: Germany vs. Us

52 Pages Posted: 11 Apr 2006

See all articles by Winfried Koeniger

Winfried Koeniger

University of St. Gallen; CESifo (Center for Economic Studies and Ifo Institute); Center for Financial Studies (CFS); IZA Institute of Labor Economics

Marco Leonardi

Università degli Studi di Milano; IZA Institute of Labor Economics

Date Written: April 2006

Abstract

Capital deepening may affect the evolution of the wage differential between skilled and unskilled workers differently in countries with different labor market institutions. If labor market institutions raise the relative wage of unskilled workers in Germany, firms have incentives to invest relatively more into capital equipment complementary to unskilled workers. Instead in the US, where wage-compressing institutions are weaker, firms invest more in high-skilled workers. We provide evidence consistent with this view based on an industry panel for West Germany and the US between the 1970s and 1990s. We show that capital equipment per worker is less positively associated with the wage differential in West Germany than in the US. This descriptive evidence is robust to many alternative measures for capital and skills. Our estimates imply that capital deepening in Germany in the 1980s is associated with a reduction in the wage differential of about 10-20% in most industries. In the US instead, capital deepening is associated with an increase of the wage differential between 5 and 15% in most industries.

Keywords: capital deepening, skill premium, wage floors, institutions

JEL Classification: E22, E24, J31, J64

Suggested Citation

Koeniger, Winfried and Leonardi, Marco, Capital Deepening and Wage Differentials: Germany vs. Us (April 2006). Available at SSRN: https://ssrn.com/abstract=895671 or http://dx.doi.org/10.2139/ssrn.895671

Winfried Koeniger (Contact Author)

University of St. Gallen ( email )

Swiss Institute for Empirical Economic Research
Varnbüelstr. 14
St.Gallen, CH-9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Schaumburg-Lippe Str. 7/9
D-53072 Bonn
Germany

Marco Leonardi

Università degli Studi di Milano ( email )

14 Via Vetere
20122 Milano
Italy
+39 02 58100384 (Phone)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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