Wage Gaps, Factor Shares and Real Wages

The relationships which link real wages, capital intensity and factor shares are tested as a prelude to tests of the relationship between wage rigidities and labour market institutions. Evidence from seven countries indicates that the evolution of factor shares is well explained by changes in capital intensity, which is itself well explained by product wages and technical progress. A key implication is that changes in full employment capital-labour ratios have been the dominant reason for the longer-run decline of profit shares in Europe and Japan relative to the United States. It follows that changes in cyclically adjusted factor shares provide little or no information regarding the gap between the actual real wage and its full employment value. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.