Stagnant wages, sectoral misallocation and slowing productivity growth

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Title: Stagnant wages, sectoral misallocation and slowing productivity growth
Author: Schmöller, Michaela
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 8/2019
Year of publication: 2019
Publication date: 6.5.2019
Pages: 36
Subject (yso): palkat; tuottavuus; työmarkkinat; uudistukset
JEL: E20; E24; E60; O40; O41
Other keywords: Subdued Wage Growth; Productivity Slowdown; Misallocation; Endogenous Productivity Dynamics; Labor Market Policies
Abstract: I propose a two-sector endogenous growth model with heterogeneous sectoral productivity and sector-specific, nonlinear hiring costs to analyse the link between sectoral resource allocation, low productivity growth and stagnant real wages. My results suggest that an upward shift in the labor supply, triggered for instance by a labor market reform, as among others implemented in Germany in 2003-2005, is beneficial in the long-run as it raises growth of technology, labor productivity and real wages. I show, however, that in the immediate phase following the labor supply shock, labor productivity and real wages stagnate as employment gains are initially disproportionally allocated to low-productivity sectors, limiting the capacity for technology growth and depressing real wages and productivity. I demonstrate that due to the learning-by-doing growth externality in the high-productivity sector the competitive equilibrium is ineffcient as firms fail to internalize the effect of their labor allocation on aggregate growth. Subsidies to high-productivity sector production can alleviate welfare losses along the transition path.

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