This paper shows that wage volatility has signifi cant effects on a country's rate of economic growth. Our theoretical framework suggests two distinct channels in which wage volatility aff ects growth: a positive direct way and a negative indirect way. The direct effect stems from precautionary savings, whereas the indirect effect works through the mediating role of government size. In the empirical part, we use a 3SLS approach to analyze a panel of 20 high-income OECD countries and fi nd strong evidence for the existence of both eff ects. These results carry general and specifi c implications. In general, one needs to carefully consider indirect eff ects operating through the size of government when analyzing the eff ect of volatility on growth. Specifi c to wage volatility, our results suggest that a one standard deviation increase of volatility causes a 0.12 to 0.14 percent net increase in GDP per capita. |
