Social Democracy and the Labor Share of National Income in Affluent Capitalist Democracies

Abstract

Complementing the existing literature that focuses mostly on the personal distribution of income, this paper studies how social democratic governments affect the factor distribution of national income between capital and labor, in the corporate sector. Drawing from the literature on partisanship and macroeconomic performance, I show that, conditional on strong corporatism, left governments increase the capital/labor input ratio in the corporate sector. I connect this finding to the literature on the labor share, which suggests that a higher capital/labor ratio reduces the labor share when labor is low-skilled but increases the labor share when labor is high-skilled. Drawing from data across 15-18 OECD countries (1985-2005), I show that left governments tilt the division of income in favor of labor when labor is high-skilled, but in favor of capital when labor is low-skilled. Furthermore, left partisanship influences the labor/capital division of income only when corporatist institutions are strong.