In Discussion Paper No. 1071, John Van Reenen examines the impact of technological innovation on wages using a panel of 600 UK manufacturing firms. This relationship is of interest in its own right given the recent literature linking changes in the UK and US wage structure to new technology. In this literature, technology is generally unobserved and taken as a residual explanation. By contrast the author uses observable innovation counts from a large scale survey of 4,378 new products and processes commercialised in the UK between 1945 and 1983.

The paper utilises 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 wages. This appears consistent with a model where wages are partly determined by sharing 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. This suggests substantial amounts of rent-sharing in the UK economy. One implication of the research is that there is no simple relationship between union power and rent-sharing. Although stronger amongst unionized firms, companies in highly unionized industries actually raised wages less in the face of innovative change.

The Creation and Capture of Rents: Wages and Innovation in a Panel of UK Companies
John Van Reenen

Discussion Paper No. 1071, November 1994 (HR)