Abstract

We analyze the effect of the productivity–wage gap on share prices. Batra argues that the productivity–wage gap may be the main factor behind the stock market bubble of the 1990s. We employ both multiple regression analyses and Granger Causality/impulse response function (IRF) analyses to examine the relationship between share prices and the productivity–wage gap, using quarterly data for the U.S. economy for 1970–2000. Our empirical findings are somewhat supportive of this hypothesis. The influence of the productivity–wage gap on stock prices is significant; however, the rise in stock prices may also have an effect on the productivity–wage gap.

Author Keywords: Productivity–wage gap; Causality; Exogeneity

F31; F41; E44