The Effect of Innovation on Wage Increases - Japanese firm-level rent sharing analysis

In recent years, the Japanese government has adopted a growth strategy centered on wage increases, yet domestic evidence on whether innovation drives up wages remains scarce. This paper estimates the impact of innovation on wages using labor productivity and patent applications, based on Japanese firm panel data. To control reverse causality, we employ a System GMM dynamic panel estimation. Furthermore, we examine heterogeneity in effects across firms using an interaction term with the Labor Cost Suppression Dummy (LCSD). Key findings are that labor productivity consistently exerts a positive effect on wages. Conversely, the coefficient for the interaction term LCSD × productivity is negative and significant, indicating that even with equivalent productivity growth, wage pass-through weakens in firms with a labor cost suppression orientation. These results suggest that achieving sustained wage increases requires policy responses that combine innovation promotion with rent distribution design within firms.