JultikaUniversity of Oulu repository

We use a dynamic specific-factors model in order to analyze how factor incomes, i.e. wages, interest rate and land rent, change when food prices rise. Special attention is given to the effects of food price shocks on wages. In the context of the theory, a food price shock affects factor incomes through labor and capital markets. The magnitude of the effect of a price shock is defined by labor shares of the productive sectors, saving allocation, elasticity of substitution in the agricultural sector and factor intensities. A rise in food prices is likely to have a significant positive effect on wages when the labor share and the elasticity of substitution in the agricultural sector are large and the savings are relatively more allocated towards the capital using sector. Furthermore, we test the effect of a food price shock on wage in the United States by employing simple Ordinal Least Square method. The results suggest that a one percent rise in the relative price of food lifts wages by 0.10–0.15 percent. However, the explanatory power of our models was low and therefore there is a possibility of omitted variable bias, despite the fact that the correlation between the independent variables and the residuals remained low.