Wage inequality and its effects on labor productivity Laura Policardo * Lionello F. Punzo † Edgar J. Sanchez Carrera ‡ Abstract Can be wage inequality harmful for productivity growth? We present a simple theoretical model according to which workers concern on wage inequality affects their labor productivity. So labor produc- tivity decreases if wage differentials among workers is increasing. Then, after to test for Panel Granger Causality we estimate a dynamic panel data estimator (Arellano-Bond), and we find that wage inequal- ity reduces country’s labor productivity. Moreover, the variables given by GDP per capita, annual hours worked per worker and total population employed over total population are of significant effect over labor productivity. This in a sample of 34 OECD countries from 1995 through 2007. Keywords: Employment; dynamic panel; labor market and labor productivity; workers’ effort. JEL Codes: C23; J23; J24; J31; J41. * University of Siena. E-mail: policardo@unisi.it † University of Siena. E-mail: punzo@unisi.it ‡ Facultad de Economia, UASLP (M´ exico). E-mail: edgar.carrera@uaslp.mx 1