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Labor Market Institutions, Wages, and Investment: Review and Implications
Labor market institutions, via their effect on the wage structure, affect the
investment decisions of firms in labor markets with frictions. This observation helps
explain rising wage inequality in the US, but a relatively stable wage structure in Europe
in the 1980s. These different trends are the result of different investment decisions by
firms for the jobs typically held by less skilled workers. Firms in Europe have more
incentives to invest in less skilled workers, because minimum wages or union contracts
mandate that relatively high wages have to be paid to these workers. I report some
empirical evidence for investments in training and physical capital across the Atlantic,
which is roughly in line with this theoretical reasoning.
SEQUENTIAL INNOVATION, PATENTS, AND IMITATION
How could such industries as software, semiconductors, and computers
have been so innovative despite historically weak patent protection? We argue that
if innovation is both sequential and complementary—as it certainly has been in
those industries—competition can increase firms’ future profits thus offsetting
short-term dissipation of rents. A simple model also shows that in such a dynamic
industry, patent protection may reduce overall innovation and social welfare. The
natural experiment that occurred when patent protection was extended to software
in the 1980's provides a test of this model. Standard arguments would predict that
R&D intensity and productivity should have increased among patenting firms.
Consistent with our model, however, these increases did not occur. Other evidence
supporting our model includes a distinctive pattern of cross-licensing in these
industries and a positive relationship between rates of innovation and firm entry.
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