Will a productivity-oriented wage policy stabilize the labor share?

Published in "ifo-Studien" (which is now "CESifo Economic Studies") 1/2001, pp. 25-39.

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Abstract: In the mid 1980s, the German Council of Economic Experts suggested a "productivity-oriented wage policy" rule. Some time series analytical considerations show that such a policy will fail to stabilize the labor share in the long run, except in the special case of a Cobb-Douglas production function. In general, the necessary cointegrating relationships cannot be established because the policy rule is formulated in terms of growth rates instead of levels. This finding holds for forward-looking rational as well as for backward-looking expectations. Some evidence is presented showing that the problem applies to the West German economy in the period 1980-1994.

(Latest update: October 2017)