Institutions, capital stock and wage setting in Spain

Abstract

This paper confronts two distinct perspectives of the labour market: the institutionalist view -highlighting equilibrium and labour market institutions- and the Chain Reaction Theory -emphasising dynamics and the growth drivers' role in labour market performance-. We consider the ratio of public to private capital stock as a growth driver relevant to the labour market; provide different economic rationales for this ratio to exert a negative influence in wage setting; and explore its empirical relevance in the context of a wage setting curve for Spain comprising the standard variables. There are two main results. First, several institutional variables taken to be critical to explain unemployment in the mainstream literature are not relevant for the Spanish wage setting curve. Second, there is a negative and significant influence of the ratio of public to private capital stock, which is robust to different specifications of the wage setting equation.