Labor Income Share Research Articles

The Agricultural Productivity Gap and Self-Employment Bias in the Labor Income Share

We propose a theory-based adjustment to the labor income share to correct for the self-employment bias. Through a two-sector neoclassical framework with agriculture and non-agriculture, we derive the productivity-adjusted aggregate labor income share in terms of the agricultural productivity gap, and the labor income share in non-agriculture and value-added factor shares. We then construct a novel dataset on the labor income share at a sector level comprising of 53 countries. By applying the theory-based adjustment to our data, the average values for the aggregate and agricultural productivity-adjusted labor income share are 0.42 and 0.51, respectively. The gap between the productivity-adjusted and unadjusted figures are statistically significant only in agriculture, which can be attributed to the heavily underreported income from self-employed workers in agriculture. These findings appear robust at a more disaggregated level of non-agricultural sectors, as self-employment explains almost 98% of the variation in this gap.

The influence of minimum wage regulation on labor income share and overwork: evidence from China

Minimum Wage Regulation (MWR) can raise wage rate, but its relation with labor income share is in controversy. We explore the influence of raising wage rate on labor income share and overwork in China. Panel data regressions are taken mainly based on China’s Industrial Enterprise Database and the International Labor Organization Database. Our findings show that raising wage rate can increase labor income share without leading to overwork. Factors that may significantly increase overwork are a higher proportion of male workers, a larger income gap and a lower per-capita income. We point out that the neoclassical explanation for labor income share is not persuasive. We support policies of raising wage rate and believe MWR is an effective measure to increase labor income share.

Understanding the global decline in the labor income share

Globally, the share of income going to labor (the “labor income share”) is declining. However, this aggregate decline hides more than it reveals. While the labor income share has decreased for low-skilled workers, this has been concurrent with an increase for high-skilled workers. Globalization leading to a growing skill premium and an increasing complementarity between capital and skill through the advancement of technology explains the polarization of labor income shares across the skill spectrum.

The Impact of Foreign Direct Investment on the Labor Income Share of Listed Companies

Based on the data of China’s listed companies in Shanghai Stock Exchange and Shenzhen Stock Exchange from 2003 to 2017, this paper tries to figure out effect of FDI on China’s labor income share from a micro perspective. Now the reform and opening up and market-oriented reform in China continue to evolve, but the labor income share of foreign enterprises is not significantly bigger than that of domestic enterprises, which indicates that the promoting effect of foreign direct investment on labor income share of employees of the listed companies in China is declining or disappearing, but high-level control of foreign investors will raise the labor income share.

The Impact of Financial Integration on Labor Share of Income: An Empirical Evidence from a Panel Dataset

The Impact of Financial Integration on Labor Share of Income: An Empirical Evidence from a Panel Dataset

From Secular Stagnation to Robocalypse? Implications of Demographic and Technological Changes

Demographic change and automation are two main structural trends shaping the macroeconomy in the next decades. We present a general equilibrium model with a tractable life-cycle structure that allows the investigation of the main transmission mechanisms by which demography and technology affect economic growth. Due to a trade-off between innovation and automation, lower fertility and population ageing lead to reductions in GDP per capita growth and the labour income share. During the demographic transition, the extent growth and factor shares are affected depends on alternative labour market configurations and scenarios for the integration of robots in economic activity.

Employment protection legislation and labour income shares in Europe

The paper analyses the determinant elements of the evolution of labour income share, measured by the size of compensation of employees as a percentage of GDP in twenty European economies. In doing so, special attention is paid to the impact of employment protection legislation. Our study?s results show that the evolution of labour income share is explained by the economic growth, the growth of employment and unemployment rates, and the growth of real wages. Regarding employment protection, only employment protection for temporary workers matters. Our results shows that stricter provisions on the use of fixed-term and temporary agency contracts have a positive impact on the growth of the labour shares.

Artificial Intelligence, Income Distribution and Economic Growth

The economic impact of Articial Intelligence (AI) is studied using a (semi) endogenous growth model with two novel features. First, the task approach from labor economics is reformulated and integrated into a growth model. Second, the standard representative household assumption is rejected, so that aggregate demand restrictions can be introduced. With these novel features it is shown that (i) AI automation can decrease the share of labor income no matter the size of the elasticity of substitution between AI and labor, and (ii) when this elasticity is high, AI will unambiguously reduce aggregate demand and slow down GDP growth, even in the face of the positive technology shock that AI entails. If the elasticity of substitution is low, then GDP, productivity and wage growth may however still slow down, because the economy will then fail to benefit from the supply-side driven capacity expansion potential that AI can deliver. The model can thus explain why advanced countries tend to experience, despite much AI hype, the simultaneous existence of rather high employment with stagnating wages, productivity, and GDP.

New Firms, Capital Intensity and the Labor Share: New Theoretical and Empirical Insights

This paper considers a two sectors heterogeneous firms model where firms’ specific production technology and capital intensity are endogenously determined through business dynamics. It shows that a shock to the relative price of investment goods is followed by the entrance of new firms characterized by higher capital intensity of production and lower labor income share. Using ORBIS firm-level data of the US economy, the paper finds strong and robust evidence confirming that new firms enter the market with higher capital intensity. Furthermore, firms-level data are used to show that the labor share is significantly affected by capital intensity, as well as by firms’ size and firms’ mark-up.

Development and the Labor Share

Abstract A U-shaped relationship between development and the labor share of income is brought to light. To do so, a panel dataset on the labor share in the manufacturing sector of developing countries is exploited. This dataset has greater coverage than the ones of previous studies focusing on developing countries. These data are also available at the disaggregated level for 28 manufacturing subsectors. This allows us to show that the U-shaped pattern of the labor share is also observed at the subsector level, suggesting that it does not correspond to reallocation forces across manufacturing subsectors during the development process. Standard theories of development economics that feature duality in the labor market easily generate such a pattern.

Financialization and the Labor Share of Income

Abstract Financialization has been growing importance in macroeconomic perspectives since the finance-dominated capitalist relations have captured many of the specific positions in an aggregate economy. However, the empirical literature has substantially ignored the examination of the link between an increasing scale of financialization and the rising income inequality. In this study, a major hypothesis is based on the fact that the finance-dominated capitalism has a considerable effect on distributional practices through the channels of bargaining power. By applying the Kaleckian approach, the paper investigates the relationship between financialization and the labor share of national income using a panel dataset of 52 countries over the 1992-2012 period. The results suggest that a higher level of stock market development leads to a more unequal distribution of income and, thus, to the decline of wage share in the national income. Other factors such as globalization and technical change can also exacerbate the decline of wages, coupled with a decrease in the bargaining position of labor measured by unemployment rate and labor force participation rate.

Income shares, secular stagnation and the long‐run distribution of wealth

AbstractFour alarming stylized facts have recently emerged in the United States: (a) a decline in the labor share of income; (b) a decline in labor productivity; (c) an increase in the top 1% wealth share and (d) an increase in the capital‐income ratio. In Capital in the XXI Century, Thomas Piketty's argument is that the r > g inequality determines an increase in the capital‐income ratio; if the elasticity of substitution in production is above one, the profit share rises. We provide a contrasting explanation that draws from the Post Keynesian approach to differential saving propensities between classes and the Classical‐Marxian theory of induced technical change. In a simple model of “capitalists” and “workers,” we show that institutional changes that lower the labor share—declining unionization, increasing monopsony power in the labor market, the global ‘race to the bottom' in unit labor costs or the exhaustion of path‐breaking scientific discoveries—can reduce labor productivity growth because of the lessened incentives to innovate to save on labor costs. A falling labor share reduces workers' total savings, and wealth concentrates in the capitalists' hands. A higher profit share and wealth share both put pressure on accumulation: but the long‐run growth rate, which is anchored to labor productivity growth, has fallen. To restore balanced growth, the capital‐income ratio must rise, independent of the elasticity of substitution. These tendencies are not inevitable: taxation can be used to implement any wealth distribution targeted by policymakers, while worker‐crushing institutional arrangements can also in principle be reversed through policy. Neither change appears likely given the current institutional and global policy climate.

The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data

AbstractWe take a fresh look at the aggregate and distributional effects of policies to liberalize international capital flows—financial globalization. Both country‐ and industry‐level results suggest that such policies have led on average to limited output gains while contributing to significant increases in inequality. The country‐level results are based on 228 capital account liberalization episodes spanning 149 advanced and developing economies from 1970 to the present. Difference‐in‐difference estimation using industry‐level data for 23 advanced economies suggests that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and higher elasticity of substitution between capital and labor.

The Puzzle of SOE Reform and the Change of Labor Income Share: From the Perspective of the Unbalanced Growth of Enterprise Efficiency and Wage Level

The role of SOEs in the economic development is crucial, so the reform involving state-owned economies is related to the healthy development of the entire economy. In order to further enhance this role, the state has formulated and implemented a series of measures to promote the reform of SOEs from the early 1990s. However, the reform of SOEs to promote the rapid development of the economic system has also caused concern in all sectors of society. With the steady advancement of SOE reform, the labor income share of reformed enterprises has shown a significant downward trend. Existing scholars mainly explain the puzzle from the perspective of reducing factor market distortions and wage bargaining power. Different from the previous research literature, this paper finds that the salary level of employees has not decreased significantly after the reform, and it shows a certain upward trend. By constructing a theoretical model, this paper gives a new perspective to explain the reduction of labor income share in the restructuring of SOEs. It argues that the share of labor income is composed of two parts: wage level and labor productivity. The reform of SOEs has produced a lifting effect on wage levels and labor productivity. Considering the existence of competition among laborers in the labor market, the wages of employees have not risen sharply with the productivity of labor, resulting in an unbalanced growth in efficiency and wage after the reform of SOEs. This paper examines the reform of SOEs between 1999 and 2007. The empirical study supports the above findings using the fixed-effects model. This conclusion is still valid by replacing the definition criteria of SOEs, adopting the propensity score matching method to overcome the sample selection bias, and using the interaction between local fiscal pressure and the number of SOEs as the instrumental variable of the reform. In the long run, the impact of the difference in labor income share caused by SOE reform has gradually weakened. Finally, this paper finds that enterprises in capital-intensive industries, large enterprises, and enterprises in the central and western regions are more affected by the reform, and the increase in wage and labor efficiency is also more obvious. This paper reveals the underlying reasons for the decline in labor income share, which resolves people’s doubts about SOE reform and concerns about the growth of non-SOEs’ share. It provides a theoretical basis for deepening market-oriented reforms and policy advice for accelerating salary structure adjustments. At the same time, this paper examines the changing trend of labor income share and its economic logic caused by SOE reform from the micro-view system, which also provides a solid micro-foundation for explaining the puzzle for the decline of labor income share.

Technological Changes, Offshoring, and the Labor Share

Existing studies on the downward trend in the labor share of income mostly focus on changes within individual countries. I document, however, that half of the global decline in the labor share of income can be traced to the relocation of activities between countries. I develop a two-country model to show that when the relative price of investment goods falls, production activities with a small elasticity of substitution between capital and labor tend to get offshored from high- to low-wage countries. The model provides an explanation as to why such relocation may drive the labor share down in both developed and developing economies, as well as globally.

The decline of the labor income share in Mexico, 1990–2015

• Mexicós labor share fell from 1990 to 2015 because of reductions in formal sectors. • Stagnant productivity in the self-employment sectors held real formal wages back. • With formal wages anchored, formal productivity gains accrued to profits. • Slow economic growth had a crucial role in the decline of the labor share. • A remaining puzzle is why a rising profit share failed to stimulate growth. The paper studies the decline of the labor income share ( LIS ) in Mexico during the period 1990–2015. The decline is mostly explained by reductions within the economy’s major sectors (including manufacturing, tradables, and non-tradables) rather than by a recomposition of value added towards sectors with low labor shares. In contrast to agriculture—where LIS fell due to a shift of labor force from self-employment to wage-employment—in other major areas of the economy the fall in LIS is explained by reductions within the wage-employment sector. Econometric estimations indicate that parallel declines in the wage share and relative productivity of non-tradables and in the US manufacturing labor share all played a large role in the reduction of the manufacturing wage share in Mexico. More generally, the analysis suggests that the lagging productivity of the economy’s informal non-tradable sector—itself a reflection of the country’s low aggregate rate of economic growth—is a crucial factor in the fall of LIS in the formal sectors. The paper concludes by discussing possible explanations for the paradox of the slow rate of economic growth in Mexico despite the rise in the profit share.

Labor Market Institutions and Wage-led Growth: A Panel Cointegration Approach

This study analyzes the long-term effect of labor market institutions, such as minimum wage and union density, on inequality, investment, growth, and consumption, by using data of the member countries of the Organization for Economic Co- operation and Development since the 1970s. Labor market institution variables are used to test arguments on wage-led growth theory. Panel cointegration approach was used to investigate the long- term effect of these variables. Results of panel cointegration test show that variables of labor market institutions are not robustly correlated to macroeconomic outcomes in the long run. This condition is not in accordance with the findings of the proponents and critics of wage-led growth. No robust evidence exists to show that increasing minimum wage and union density, which are representative policies for wage-led growth, are correlated to inequality, labor income share, consumption, investment, or growth in the long run. Estimation results of this study suggest that the empirical basis of support and criticism for wage-led growth theory is weak.

Could Habits Make the Labour Income Share Fall?

Could habits in the consumption of high-tech goods in leisure activities make the labour income share fall? A competitive equilibrium model is constructed, where consumer utility is separable in conventional consumption and a high-tech good-such as video games or smartphones-whose contribution to utility depends on habit formation. The predictions from this framework is consistent with downward trends in the labour income share. Unlike alternative theories, the model also predicts trends in wages, interest rates and consumption growth that all consistent with the data since the mid-1990s.

Measuring the Labor Income Share of Developing Countries: Lessons From Social Accounting Matrices

This paper addresses the challenges of measuring the labor income share of developing countries. The poor availability and reliability of national account data as well as the fact that self‐employed—whose labor income is hard to capture—account for a major share of the workforce and often work in the informal sector render its computation difficult. Consequently, measuring the labor share requires assumptions. I consult social accounting matrices in addition to national account data to gain information on the production structure and self‐employed incomes in developing countries. The final data set covers about 90 developing countries from 1990 to 2011. The data suggest that the finding of declining labor shares of previous studies also applies to the sample of low and middle‐income countries. Furthermore, I find the labor share in developing countries to be about one‐half in size and hence less than the standard “two‐thirds” in economic literature.

New evidence on the historical growth of government in Europe: The role of labor costs

We document a robust positive correlation between the size of government and the labor share of income in data from European countries covering the period 1869–1975. Following Facchini et al. (2017), we interpret this correlation as evidence that labor costs drive public spending. The long-term increase in the labor share observed over this period explains half of the overall growth of central government. The relationship holds when the labor share is instrumented with movements in technological change at the frontier. When decomposing public spending, transfers, not intensive in labor, are the only component not associated with the labor share.