Wage-setting and capital in unionized markets: Evidence from South Europe

The present paper analyzes the optimal response of real wages to the installed capital stock in a dynamic monopoly union. We use data from five Southern European countries during the period 1970-2010. We explore how this rent-extraction response changes over time and across countries depending on the labor market regulatory environment or regime. Regimes are allowed to be determined endogenously by the econometric methodology and seem to be consistent with relevant anecdotal evidence. We find that wages responded positively to the capital stock during periods of heavy regulation, while this response was significantly lower or even negative when labor markets became more flexible.