DP1071 The Creation and Capture of Rents: Wages and Innovation in a Panel of UK Companies

Author(s): John Van Reenen

Publication Date: November 1994

Keyword(s): Innovation , Rent-Sharing , Wages

JEL(s): J51 , O33

Programme Areas: Human Resources

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This paper examines the impact of technological innovation on wages using a panel of UK manufacturing firms. We utilize a headcount measure of major innovations between 1945-83 combined with share price and accounting information. Innovating firms are found to have higher average wages, but rival innovation tends to depress own wages. This appears consistent with a model where wages are partly determined by a sharing in the rents generated by innovation. In other words innovation may be a good instrument for proxies for rents such as profitability, quasi-rents or Tobin's q. Instrumental variable estimates of the elasticity between wages and quasi-rents are about 0.3, remarkably close to the recent findings of Abowd and Lemieux (1993).