Factor Income Distribution Research Articles

Does carbon ETS affect the distribution of labor's slice of the factor income pie? From the low carbon transition perspective

The carbon emission trading scheme (hereafter ETS) impacts firms' production decisions and promotes them to achieve low-carbon transition. This transition entails the movement of both labor and capital factors and consequently triggers re-distribution of factor income. To analyze the impacts of the carbon ETS on factor income distribution, we first theoretically incorporate carbon emission permit as a new factor into the general equilibrium model, shedding light on the potential mechanism. Utilizing city-level panel data from 2003 to 2019 and employing a staggered difference-in-differences (DID) model, we find that the carbon ETS is inclined to benefit labor at the expense of capital, exhibiting a progressively strengthening dynamic effect. Furthermore, we verify the intra-industry and inter-industry low carbon transition are valid mechanisms. Overall, these findings imply that implementing carbon ETS contributes to increasing the labor share of factor income. This study suggests that market-based climate policies have the potential to mitigate excessive reliance on capital and fossil fuels through low-carbon transition. Furthermore, it offers insights into mitigating the declining trend of labor income share.

Can social insurance contributions boost labor share?—Evidence from China’s social insurance law

Improving the factor income distribution is a crucial issue in the field of income inequality. Using large-scale data from China’s National Tax Survey from 2008 to 2016, this paper examines the impact of the implementation of the Social Insurance Law on firms’ labor share and its mechanisms. The results show that the Social Insurance Law significantly reduces firms’ labor share. Although it increases the firms’ social insurance rate and total amount of social insurance contributions, firms respond by reducing the number of employed labors and net wages to mitigate rising labor costs, as well as adopting alternative technological advancement patterns and capital deepening behavior, leading to a reduction in labor share. The weakening effects of Social Insurance Law primarily exist in non-SOEs, and MSEs, and firms faced with higher financial constraints and located in lower judicial quality areas. Our study suggests that stronger social security collection could account for the decline in labor share worldwide.

Investment subsidies and redistributive capital income taxation in a neoclassical growth model

AbstractHow do investment subsidies bear on pure redistribution when coupled with capital income taxes? In a heterogeneous agent, neoclassical growth framework it is found that on impact, with no optimizing behavior, investment subsidies are good for growth but bad for redistribution. The opposite holds for capital income taxes. But when the government acts as a Stackelberg leader vis‐à‐vis the private sector (the follower), the optimal feedback policy is by construction time‐consistent and implies that in a long‐run optimum the tax scheme does not distort accumulation. This holds regardless of social preferences. For the feedback Stackelberg equilibrium I find that (pure) redistribution can go either way and capital income taxes are nonzero in the long‐run, time‐consistent optimum, depending on the social weight of those who receive redistributive transfers, the distribution of pretax factor incomes, and the intertemporal elasticity of substitution. It is argued that investment subsidies may be an important indirect tool for redistribution, and may allow for the separation of “efficiency” and “equity” concerns.

Fiscal multipliers: A heterogenous‐agent perspective

We use an analytically tractable heterogeneous‐agent (HANK) version of the standard New Keynesian model to show how the size of fiscal multipliers depends on (i) the distribution of factor incomes, and (ii) the source of nominal rigidities. With sticky prices but flexible wages, the standard representative‐agent (RANK) model predicts large multipliers because profits fall after a fiscal stimulus and the resulting negative income effect makes the representative worker work harder. Our HANK model, where workers do not own stock, and thus do not receive profit income, predicts smaller fiscal multipliers. In fact, they are smaller with sticky prices than with flexible prices. When wages are the source of nominal rigidity, in contrast, fiscal multipliers are close to one, independently of income heterogeneity and price stickiness.

Rethinking the Role of Foreign Direct Investment in Africa: A Factor Income Distribution Based Analysis

Rethinking the Role of Foreign Direct Investment in Africa: A Factor Income Distribution Based Analysis

Does the rise of global value chain position increase or reduce domestic income inequality?

ABSTRACT Most studies investigate the relationship between global value chain position (GVC position) and income inequality through labour’s wage aspect. And they attribute the increasing domestic income inequality to the rise of the country’s GVC position, which may widen the wage gap between heterogeneous labour. However, wage income distribution is just part of the domestic residents’ income distribution and factor income distribution also matters. In view of this, we add labour share as well as labour’s wage gap into one system, and use united theoretical and empirical analyses to explore the impact of GVC position on domestic income inequality. Research findings show that: (1) The rise of GVC position will reduce domestic income inequality. (2) The channels by which GVC position affects domestic income inequality are labour share and wage gap. Although the rising GVC position will improve domestic income inequality by increasing wage gap, it will decrease domestic income inequality more by increasing labour share. And the overall impact of both effects would reduce domestic income inequality.

Capital depreciation allowances, redistributive taxation, and economic growth

AbstractAre capital depreciation allowances when coupled with capital income taxes good instruments for redistribution in the long run? In a simple two‐agent‐economy I find that accelerated depreciation is good for growth, but bad for redistribution. The opposite holds for capital income taxes. However, in a feedback Stackelberg equilibrium, where the government is the leader and the private sector the follower, the depreciation allowance is maximal in the long run, time‐consistent optimum. This removes the accumulation distortion of capital income taxes. Furthermore, the latter, and so redistribution, is found to be generically nonzero in the time‐consistent optimum, and depends on the social weight of transfers receivers, the pretax factor income distribution, the intertemporal elasticity of substitution and the time preference rate. Thus, accelerated depreciation allowances are an important indirect tool for redistribution. The tax scheme allows for a separation of “efficiency” and “equity” concerns for redistributive policies.

The Intersection of Biophysical Economics and Political Economy

The circular flow diagram, whether in its limited form in macroeconomics, or broader form in ecological economics, depicts a duality of flows – physical resources in one direction with financial transactions in the opposite. Biophysical models of the economy can be constructed based on the physical flows and their associated stocks. In previous work, I demonstrated how the accumulation of wealth – measured by the capital stock – can be established using a biophysical model. With capital, energy use, and the distribution of labour determined by biophysical economics, here I investigate the range of potential distributions of wealth – profits versus wages – that follow in the political economy. The analysis is conducted using a four-sector model of Great Britain's economy from 1760 to 1913, including agriculture, coal mining, construction & materials, and production of goods and services. Energy price is a key variable in the model, influencing the distribution of income between different sectors. Taking the price of coal at historically observed values, the distribution of total factor income per worker is plotted as a trade-off between annual wages and profits per worker for example years of 1761, 1817, and 1871. The plots reveal how possible alternative distributions of income might be achieved under different political-economic regimes, subject to the same biophysical constraints. Conclusions are framed in the context of the grand challenges faced by ecological economists of developing environmentally sustainable economies with a just and equitable sharing of resources.

Evolutionary microdynamics of employee profit sharing as productivity-enhancing device

We devise an analytical framework where the distribution of factor income across agents and the distribution of labor earnings across workers is influenced by the possibility of profit sharing with workers. Firms choose periodically to compensate workers with only a real base wage or a share of profits in addition to this real base wage as alternative productivity-enhancing strategies. As supported by robust empirical evidence, labor productivity is higher in profit-sharing firms than in non-sharing firms. The frequency distribution of productivity-enhancing strategies and labor productivity across firms are co-evolutionarily time-varying, which impacts on the distribution of factor income between profits and wages and thereby on the rates of employment and output growth, as well as on the distribution of labor earnings across workers. Heterogeneity in productivity-enhancing strategies across firms (and hence labor earnings inequality across workers) may be a stable long-run equilibrium outcome. This polymorphic equilibrium features the frequency of profit-sharing firms and the employment rate varying positively (negatively) with the real base wage (profit-sharing coefficient). Yet the employment rate is path dependent in the polymorphic equilibrium. As shown analytically and with numerical simulations, the microdynamics landscape is shaped by the real base wage and the profit-sharing coefficient as bifurcation parameters.

Fiscal Multipliers: A Heterogenous-Agent Perspective

We use an analytically tractable heterogeneous-agent (HANK) version of the standard New Keynesian model to show how the size of fiscal multipliers depends on i) the distribution of factor incomes, and ii) the source of nominal rigidities. With sticky prices but flexible wages, the standard representative-agent (RANK) model predicts large multipliers because profits fall after a fiscal stimulus and the resulting negative income effect makes the representative worker work harder. Our HANK model, where workers do not own stock and thus do not receive profit income, predicts smaller fiscal multipliers. In fact, they are smaller with sticky prices than with flexible prices. When wages are the source of nominal rigidity, in contrast, fiscal multipliers are close to one, independently of income heterogeneity and price stickiness.

The Impact of Minimum Wage Regulation on the Share of Labor Income in Enterprises: Theoretical Analysis and Microscopic Evidence

The minimum wage regulation aims to safeguard the legitimate rights and interests of workers in obtaining labor remuneration, which will inevitably affect the wage rate of enterprises and thus affect the distribution of factor income within enterprises. The theoretical model of this paper shows that the wage rate effect of the minimum wage regulation promotes enterprises to change the mode of factor distribution （capital-labor exchange）, leading to the increase of enterprise capital intensity, and thus the share of labor income will decline. Using the minimum wage standards of more than 2600 districts and counties in China and the data of industrial enterprises （1998-2013）, the empirical research confirms the theoretical expectation: （1）The regulation of minimum wage significantly reduces the share of labor income of enterprises. Specifically, every 10% increase of minimum wage will significantly reduce the share of labor income by 1.43 percentage points; （2）The regulation of minimum wage has the effect of wage rate and labor productivity, but the smaller effect of wage rate makes the share of labor income decrease; （3）Capital intensity is an important mechanism for minimum wage to affect the share of labor income. This paper is helpful to understand the impact of the minimum wage regulation on the behavior of enterprises in China and to provide beneficial policy enlightenment for improving the pattern of primary income distribution in China.

The impact of collective use rights on share contracts: the case of the Extractive Artisanal Regime (RAE) in Chilean hake fisheries

AbstractShare contracts are the dominant remuneration system in artisanal fisheries. Introducing regulations based on collective use rights may affect the way profits are distributed. The literature on the effect of regulatory reform on factor income distribution, however, is scarce. In this paper, we look at differences in the implementation of the Extractive Artisanal Regime in Chilean hake artisanal fisheries to test its effect on share contracts. We estimated a switching regression model using census data to calculate the average treatment effect. Our results show that crewmembers in communities regulated by some form of collective use rights receive, on average, 6 per cent more of total net incomes compared to those regulated by a limited access with global quota regime. Differences in the relation between crew size and labor rewards, as well as in the negotiating power of crewmembers under different regimes, may explain the results.

Distribution and Gender Effects on the Path of Economic Growth: Comparative Evidence for Developed, Semi-Industrialized, and Low-Income Agricultural Economies

This paper applies a robust empirical methodology, which considers issues relating to cross-country heterogeneity and cross-sectional dependence, to inspect the contributions of gender equality and factor income distribution to an economy's growth path. A dynamic model of aggregate demand is estimated on a unique panel dataset from 46 countries that are further grouped into developed (DC), semi-industrialized (SIEs), and low-income agricultural economies (LIAEs). The empirical findings suggest that, overall, growth is driven by investment in the short run and domestic demand in the long run. In the short run, the results suggest that low female wages act as a stimulus to growth in SIEs but may promote contractionary pressures on demand in the long run. For LIAEs and DCs, the effect of improved labor market conditions for women--leaving men's constant--on demand-led growth conditions are positive in the short run but may harm long-term growth prospects. In all, the empirical evidence, combined with the stylized facts about institutional and economic inequality, suggests that the impact of gender and income inequality on macroeconomic outcomes will differ depending on the economic structure and level of economic development.

FACTOR INCOME DISTRIBUTION AND ENDOGENOUS ECONOMIC GROWTH: PIKETTY MEETS ROMER

What is the relationship between the economy's long‐run growth rate, its capital‐income ratio, and its factor income distribution? A satisfactory answer requires an endogenous growth and savings rate. We scrutinize Piketty's (2014) theory in a richly parameterized variant of Romer's (1990) seminal model with and without population growth. The economy's growth and savings rate are exogenous in Piketty's theory and endogenous in Romer's. In contrast to Piketty's Second Fundamental Law of Capitalism a smaller growth rate may be associated with a smaller capital‐income ratio. Moreover, it may go together with a greater or a smaller capital share. (JEL E10,E21,E25,O33,O41)

A Contribution to Theory of Factor Income Distribution, Cambridge Capital Controversy and Equity Premium Puzzle

Under very general conditions, we construct a micro-macro model for closed economy with a large number of heterogeneous agents. By introducing both financial capital (i.e. valued capital—equities of firms) and physical capital (i.e. capital goods), our framework gives a logically consistent, complete factor income distribution theory with micro-foundation. The model shows factor incomes obey different distribution rules at the micro and macro levels, while marginal distribution theory and no-arbitrage princi-ple are unified into a common framework. Our efforts solve the main problems of Cambridge capital controversy, and reasonably explain the equity premium puzzle. Strong empirical evidences support our results.

FDI and labour share of home-country: empirical evidence from micro data of Chinese enterprises

When an enterprise is operating globally, it will surely lead to the flow of production factors, and thus change the factor income distribution in the home country. This paper studies the influence of FDI on the labour share in enterprises’ home country under the background of continuous economic globalisation. Based on the theory of Heterogeneity of FDI Motivation, this paper first analyzes the influence mechanism of FDI on home country labour share. Then, with the micro data of Chinese enterprises, this paper adopts Mahalanobis distance matching and Difference-in-Differences (DID) estimation to have empirical test on the influence of FDI on the labour share in enterprises’ home country. The results show that, overall, enterprises’ FDI and labour share in the home country present a negative correlation. In terms of heterogeneity of FDI motivation, market-seeking FDI significantly decreases the labour share in the home country, while resources-seeking and technology-seeking FDI significantly increase the labour share in the home country. From the perspective of host country heterogeneity, FDI in developed countries significantly increases the labour share in the home country, while the FDI in developing countries inhibits the increase of labour share in the home country.

On the Ricardian invariable measure of value in general convex economies

This study examines the possibility of an invariable measure of value when price changes induced by income redistribution between profit and wages take place in general convex economies. While Ricardo searched for an invariable measure of value with respect to changes in both the factor income distribution and the technique, Sraffa constructed a standard commodity serving as a measure of the change in a factor income distribution alone by leaving aside the possibility of changes in the size and composition of output and means of production. This study allows for the possibility that a change in factor income distribution involves a change in technique, and proposes an extension of Sraffa's standard commodity. Then, we show that it serves as an invariable measure of value with respect to the income redistribution, even though it involves a change in technique. Finally, we examine whether the linear distributional relation is preserved.

THE INFLUENCE OF SMALL BUSINESS SPREADING ON THE DYNAMICS OF THE LABOR COSTS SHARE IN VALUE ADDED GENERATED BY LEADING INDUSTRIES OF UKRAINIAN ECONOMY

The article is devoted to empirical testing of two initial hypotheses. The first is that the small business spreading in the Ukrainian economy would contribute to changing conditions of factor incomes distribution in favor of hired workers. The second is exactly such changes in the distribution of factor incomes (which is expressed by increasing in the share of labor costs in gross value added generated by leading types of economic activity) will contribute to the social efficiency increasing of economic activity.The processes of implementation of the potential of small business to mitigate the negative social consequences of the deterioration of the macroeconomic situation are researched in the article. The contribution of small business to the dynamics of the share of wages in the value added by main types of economic activity was determined and the compliance of the specified contribution to the potential of a small business to improve the realization of the interests of hired workers in the relations of factor incomes’ primary distribution was assessed.The method of "weighted differences" was used for quantitative estimation of the structural shifts impact on the aggregate for both sectors of large and small business indicators. The mentioned method was transformed according to the author's technique in order to include in the calculations the value of a qualitative indicator by the reporting period against the base period. This allows us to assess the contribution of qualitative changes, occurring in the small and large business sectors, to the dynamics of the average characteristics of the factor incomes distribution, inherent to the leading types of economic activity in the Ukrainian economy.The obtained results did not confirm the first hypothesis and allowed to substantiate the conclusion that the spreading of small business by itself (which is not accompanied by qualitative changes in the role of human resources and improvement of conditions for its reproduction) does not allow to expect the improving conditions of employees’ access to the main source of qualification, professional and social mobility – high labor income.

Extrapolative expectations and capital flows during convergence

How long shall a country take to learn the world technological frontier? What would happen if that country found the same difficulties in learning the true model of its economy? After all, countries catching up often experience life-changing transformations during the catch-up to a balanced growth path. We show that an open economy, learning rational expectations alongside foreign technology, may be characterized by excessive saving and current account surpluses, as often observed in the data and at odds with the standard open economy theoretical predictions, and not fully explained by standard adaptations such as habit formation. Moreover, such a learning process in a large developing country can upset the savings behavior of a fully rational expectations advanced country. In a US-China calibration, we show that this effect can be so strong as to explain important current account imbalances, the savings glut hypothesis, as well as the distribution of factor income.

Production, Distribution, and Trade: General Equilibrium Models with One Single Cobb-Douglas Parameter

We present simple general equilibrium models of resource allocation, factor income distribution, and trade among nations that are technologically identical, but different in tastes. Under conditions of autarky, this paper highlights the importance of “tastes” that determine the intra-national factor shares of returns to productive factors. We demonstrate how a stronger taste for specified factor-intensive goods leads to higher returns to factors intensively used. Trade, in our model, however, erases both intra-national and inter-national factor income inequalities caused by taste differences. Trade, therefore, is no good news to those factors and income groups benefitting from autarky. Free trade therefore is a difficult proposal not only in practice, but also in theory.