Abstract
This chapter finds that the point elasticity estimates indicate that the capital-labour ratio is responsive to a positive shock to the minimum wage. In addition, periods of low- (high-) GDP growth regimes have a high (low) elasticity and this is consistent with the Schumpeterian creative destruction based on endogenous growth models. The process of creative destruction during economic downturns and recessions affects the structure of labour productivity growth in different sectors and leads to various firms replacing their capital stock. The capital-labour ratio increases more during the high inflation regime than in the low inflation regime. The policy implication is that price stability matters for the response of the capital-output ratio to a positive shock to the minimum wage. The low-inflation regime is important to mitigate the heightened substitution effect of labour for capital following a positive minimum wage shock.
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Notes
- 1.
Much international literature provides consistent new empirical evidence indicating that recent decades have seen a downward trend for labour share in a majority of countries for which data are available. The OECD (2012) and the ILO Global Wage Report (2010/11) show that over the period 1990 to 2009 the median labour share of compensation in national income declined from 66.1 per cent to 61.7 per cent in 26 out of 30 developed economies. Similarly, these reports document that the decline in the labour income share was even more pronounced in many emerging and developing countries. Evidence, shows that in China, where wages roughly tripled over the last decade, the labour income share declined, largely because GDP growth increased at a faster rate than the total wage bill.
- 2.
Siitonen (2016) states that the Schumpeterian model describes creative destruction as the cleansing of the production structures so that companies with new technologies and production methods replace previous ones. Features of the Schumpeterian growth model are that growth is generated through innovations as previous technologies are replaced by new; in turn, innovations stem from private investments which are themselves motivated by gains from monopoly rents. The growth models are explained as capital (K) and labour (L) and technological or knowledge-based (R&D ) growth (A). Technology was initially considered an exogenous variable. Hence, these models are referred to as exogenous growth models or Solow models or Solow–Swan models.
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Gumata, N., Ndou, E. (2017). The Impact of the Minimum Wage on Capital-Labour Ratio Dynamics. In: Labour Market and Fiscal Policy Adjustments to Shocks. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-66520-7_9
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DOI: https://doi.org/10.1007/978-3-319-66520-7_9
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