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The Labour Share and Corporate Financialization: Evidence From Publicly Listed Firms
Abstract
This article examines the impact of corporate financialization on the labour share using data for publicly listed non‐financial corporations across 14 European countries. We test hypotheses derived from industrial relations literature on financialization against competing explanations for the labour share decline based on technological change and market concentration. Our findings show that increased dividend and interest payments, as well as financial profits, are associated with a fall in the labour share. These results support theories linking corporate financialization to rising overhead costs, shareholder‐value orientation and increasing exit options for capital. We find no evidence that technological progress drives the decline in the labour share. While market concentration negatively correlates with the labour share, concentration has decreased during our sample period, suggesting that ‘superstar firms’ are also not the primary driver of changes in functional income distribution.
This paper shows that shareholder value orientation and non-financial corporate indebtedness are negatively associated with union density within the EU over the last 21 years. We argue that the financialisation of non-financial corporations makes them prioritise their ‘external (economic) balance’ at the expense of a cooperative ‘internal equilibrium’ model. In other words, corporate financialisation pushes non-financial firms to shift to non-participatory, market-based HR systems which directly undermine the role of trade unions. This study examines this corporate financialisation-induced shift within the EU during the post-1999 phase of deeper economic integration and provides panel data econometric evidence that it has significantly undermined union membership.
We document that between 50% and 70% of changes in the U.S. wage structure over the last four decades are accounted for by relative wage declines of worker groups specialized in routine tasks in industries experiencing rapid automation. We develop a conceptual framework where tasks across industries are allocated to different types of labor and capital. Automation technologies expand the set of tasks performed by capital, displacing certain worker groups from jobs for which they have comparative advantage. This framework yields a simple equation linking wage changes of a demographic group to the task displacement it experiences. We report robust evidence in favor of this relationship and show that regression models incorporating task displacement explain much of the changes in education wage differentials between 1980 and 2016. The negative relationship between wage changes and task displacement is unaffected when we control for changes in market power, deunionization, and other forms of capital deepening and technology unrelated to automation. We also propose a methodology for evaluating the full general equilibrium effects of automation, which incorporate induced changes in industry composition and ripple effects due to task reallocation across different groups. Our quantitative evaluation explains how major changes in wage inequality can go hand‐in‐hand with modest productivity gains.
We propose a simple model to assess the evolution of the US labor share and how automation affects employment. In our model, heterogeneous firms may choose a manual technology and hire a worker subject to matching frictions. Alternatively, they may choose an automated technology and produce using only machines (robots). Our model suggests that automation reduces the labor share but increases employment and wages. Furthermore, our model suggests that labor market institutions are unlikely to have played a major role in the fall of the US labor share after 1987. Instead, technological factors are a more promising candidate.
Does leverage or product-market competition increase or decrease financial distress risk? The existing literature provides conflicting and largely a-theoretical answers. Drawing on agency theory, we hypothesize that leverage and competition are incentive-alignment mechanisms with non-monotonic and substitute effects on financial distress hazard. Using an unbalanced panel of 13,896 listed firms from 1992 to 2014 and a multi-level hazard model that takes account of frailty and endogeneity, we find that leverage or competition have a hazard-reducing effect when the discipline effect dominates the agency-cost effect. In contrast, they have a hazard-increasing effect when the discipline effect dominates the agency-cost effect. Furthermore, the level of leverage that minimizes financial distress risk is higher in less competitive industries. Finally, long-term debt is a stronger disciplining device compared to short-term debt; and the financial distress predictors widely used in the literature explain only a small fraction of the distress hazard after controlling for leverage and competition.
This historical paper analyses the distributional consequences of computerisation on the wage share of income in United Kingdom (UK) workplaces in the first decade of this century. The reasons why computerisation might increase a firm’s income but reduce the share assigned to wages are still not well understood. The uniquely rich Workplace Employment Relations Survey (WERS) 2004–2011 includes firm-level measures of the main production inputs and outputs, and thus allows an analysis of the main mechanisms through which increased computer usage influenced the wage share of income in UK workplaces over this period. This analysis shows that the proportion of employees using computers impacted the wage share in ways that were at odds with two mainstream views: that computers complement capital, and that labour can be easily replaced by capital. The results show that the proportion of employees using computers reduced the wage share by disproportionally increasing the productivity of the least skilled employees, who were not proportionally compensated for their increase in productivity. The stability of the wage share, over the period of interest, is explained by the rise in a workplace’s share of professional employees and by a rise in work effort. This positive contribution to the wage share was counteracted by an increased share of employees using computers and by a reduction in the share of employees whose pay was negotiated by unions, thereby contributing to a decline in the wage share of firm income.
JELcode
J31
The aim of this article is to discuss the ‘inclusive growth’ proposals made by the IMF, the OECD and the EU, and to examine to what extent these proposals are consistent with the objective to be achieved. To do this, we examine the importance of two ‘missing links’ commonly overlooked by these institutions when promoting ‘inclusive growth’: functional income distribution and labor market institutions.
Using a panel of 42 advanced countries for the period 1990–2018, we estimate an econometric model and we obtain two relevant results. First, functional income distribution has an important influence on income inequality. Second, collective bargaining coverage plays a significant role in explaining increases in the wage share and reductions in income inequality.
Consequently, these two ‘missing links’ must be fully integrated into the policy debate of international organizations if ‘inclusive growth’ is to be successfully promoted.
There is an ongoing debate within political economy on how finance affects capital-labour relations. Industrial relations scholars have demonstrated that financialisation empowers capital and induces the liberalisation of industrial relations. Additionally, meso and macro level studies show that finance reduced the labour share during neoliberalism. However, the literature is relatively limited and does not extend to the pre-WWII period. Considering finance as historically integral to capitalism, this paper estimates the impact of finance on the labour shares of France (1911-2010) and Sweden (1891-2000). The results show that mortgage debt decreases the labour shares of both countries, thus, the financialisation of households induces industrial discipline historically. However, the negative effect is substantially smaller in Sweden where housing finance is state-led and bargaining coordination is centralised over the last century.
This article explores the long-run relationship between financialization on
union density in Canada’s non-financial sector. Drawing on critical political economy
literatures, we argue that the shareholder business model, the growing use of financial
assets, and leading global industries, have led to a restructuring of labor markets and
unionized workforces. Evidence from panel data analysis suggests that the negative
relationship between financialization and union density holds when controlling for
economic context and sectoral characteristics. We conclude that the sectoral impacts of
financialization on union density — especially in highly financialized sectors such as
manufacturing, extractive resources, transport and warehousing - are critical to
understanding union decline and recent changes to employment relations.
This paper presents direct measures of capital costs, equal to the product of the required rate of return on capital and the value of the capital stock. The capital share, equal to the ratio of capital costs and gross value added, does not offset the decline in the labor share. Instead, a large increase in the share of pure profits offsets declines in the shares of both labor and capital. Industry data show that increases in concentration are associated with declines in the labor share.
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Is financialization contributing to the slow decline of union density that is occurring
across most advanced capitalist countries? Combining insights from literatures on
financialization, corporate governance, and comparative political economy, we
argue that the growing dominance of finance within advanced capitalism weakens
unions through several channels, and plays an important but underappreciated role
in the deunionization of national workforces. Using data from 18 advanced capitalist
countries over several decades, this assertion is tested against the literature’s existing
explanations for declining union density. Results from panel regression models
suggest that financialization is an important cause of union decline, but that its particular
effects vary between different types of advanced capitalism. The study concludes
by arguing that financialization creates new interconnections between firms
and finance capital, resulting in business practices that ultimately put downward
pressure on union densities across advanced capitalist countries
The economics of dividend policy has focused on the single tight narrative that dividends keep managers honest, mitigating concerns that they over-invest. This article provides a critique of that agency narrative, arguing that pressure from short-term focused investors, executives and board members pushes the firm into preemptive actions of returning too much cash via dividends. We analyze three channels of influence for investor pressure through 1) threat of takeovers, 2) shareholder value oriented corporate governance, measured by director independence and board equity incentives, and 3) trading and institutional ownership patterns. We find that firms
adopt a higher dividend payout to discourage takeover bids. Also, FTSE 100 firms, that are most focused on shareholder value governance in the form of equity-based compensation and a higher share of independent directors, display a higher dividend payout. Frequency of trading and ownership by transient investors seeking
current profits also predict increased dividend payout. Traditional agency theory, focused on dividends as a tool for managerial discipline, is not strongly supported by the results, which rather support a narrative of short-term investor pressure on firms irrespective of investment opportunities.
This paper conducts an empirical analysis of the relationship between financialization and neoliberalism and the labor share using panel data composed of twenty-seven European Union countries over nineteen years (from 1995 to 2013). Adopting a Kaleckian perspective, framed in the post-Keynesian literature, financialization and neoliberalism exert a negative influence on the labor share through three different channels: the change in the sectorial composition of economies (the increasing importance of financial activity and the decreasing importance of general government activity), the proliferation of shareholder value orientation, and the deterioration of general workers’ bargaining power. We estimate a labor share equation with the traditional variables (lagged labor share, technological progress, globalization, education, and output growth) and four further measures of financialization and neoliberalism (financial activity, general government activity, shareholder value orientation, and the trade union density rate). The findings show a disruptive relationship between financialization and neoliberalism and the labor share in European Union countries, mainly through the channels of general government activity and shareholder value orientation. It is also found that financialization and neoliberalism have contributed to a fall in the labor share in European Union countries. The technological progress was the main driver of the fall in the labor share in European Union countries, while the output growth was the main supporter. This suggests that the trend of decline in the labor share could intensify in the future taking into account the fears of potential secular stagnation in the current era of financialization and neoliberalism.
JEL Classification: C23, D33, E25, E44
Despite recent studies showing the impact of finance on rising income inequality in the USA, few studies examine this effect from a comparative perspective. Drawing on the 'Varieties of Capitalism' literature, we contend the relationship between finance and income inequality is amplified in countries with liberal market economies (LME). Based on a panel analysis of 17 OECD countries from 1980 to 2007, we find that growth in financial sectors and the financial labor force is associated with higher income inequality, greater wage disparities and a greater concentration of income in the most affluent households. More importantly, we find the magnitude of these effects are stronger in LME and LME-like countries. Specifically, the effect of finance on income inequality is greater in countries with weak collective bargaining, few labor protections and shareholder corporate governance. Overall, the results indicate the importance of national institutions in the relationship between finance and inequality. © The Author 2016. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved.
This paper argues that an important mechanism linking increasing rents and the rising earnings’ inequality among workers with similar skills is the increase in domestic outsourcing and the growth of networked forms of production. This has multiplied contractual relationships and legal claims to profit and rents that reflect interfirm power relations. Firms with the greatest clout are able to claim the largest share of the rents; the weakest struggle to remain viable.
The financialisation of advanced economies has developed in part through the widespread engagement of workers with the financial sector, specifically through the increasing adoption of household debt. Taking on debt establishes “investor identities” for borrowers, which disciplines borrowers to demand employment and marginalises worker bargaining power. Although increased levels of household debt have been linked with a declining wage share of national income, there has been little examination of the effects of the specific channel of mortgage credit, the largest source of household debt, on the wage share. A series of regression models were implemented to test the relationship between the total mortgage stock and the wage share of GDP in four different countries, across three different Varieties of Residential Capitalism. While the panel data results demonstrate a negative relationship between mortgage credit and the wage share across the typologies, the relationship is concentrated in the liberal markets of the UK and the USA, and does not hold independently in Sweden and Denmark. There are four important differences that may explain the divergent results: (1) mortgages in liberal markets are provided at a higher cost than in non-liberal markets; (2) the use of mortgage bonds in non-liberal markets facilitates renegotiations in periods of borrower uncertainty; (3) the level of collective bargaining in Social Democratic states may strengthen worker wage negotiations; and (4) workers in liberal markets are reliant on mortgage finance to access the home as a financial asset in systems of asset-based welfare. The combination of which may explain how the increased disciplinary effects of mortgage finance have resulted in the reproduction of the conditions for capital accumulation in liberal capitalist states.
Despite expanding literatures on financialization, scholarship exploring its relationship to labour and the labour process remains under-developed. A further obstacle has arisen from arguments that novel financialized modes of value extraction render the labour process and labour process analysis less relevant. This article challenges that view and explores how the labour process is still a vital focal point for value creation and extraction. It sets out what scholars should ‘look for’ to understand the ways in which distinctively financialized mechanisms operate in non-financial corporations and how these dynamics are translated into outcomes for and through labour. The article then provides four key propositions, drawing on labour process theory, which specify how those mechanisms are operationalized and their consequences.
Focusing on U.S. nonfinance industries, we examine the connection between financialization and rising income inequality. We argue that the increasing reliance on earnings realized through financial channels decoupled the generation of surplus from production, strengthening owners' and elite workers' negotiating power relative to other workers. The result was an incremental exclusion of the general workforce from revenue-generating and compensation-setting processes. Using timeseries cross-section data at the industry level, we find that increasing dependence on financial income, in the long run, is associated with reducing labor's share of income, increasing top executives' share of compensation, and increasing earnings dispersion among workers. Net of conventional explanations such as deunionization, globalization, technological change, and capital investment, the effects of financialization on all three dimensions of income inequality are substantial. Our counterfactual analysis suggests that financialization could account for more than half of the decline in labor's share of income, 9.6% of the growth in officers' share of compensation, and 10.2%of the growth in earnings dispersion between 1970 and 2008.
Since the early 2000s, scholars from a variety of disciplines have used the concept of financialization to describe a host of structural changes in the advanced political economies. Studies of financialization interrogate how an increasingly autonomous realm of global finance has altered the underlying logics of the industrial economy and the inner workings of democratic society. This paper evaluates the insights of more than a decade of scholarship on financialization. Three approaches will be discussed: the emergence of a new regime of accumulation, the ascendency of the shareholder value orientation and the financialization of everyday life. It is argued that a deeper understanding of financialization will lead to a better understanding of organized interests, the politics of the welfare state, and processes of institutional change.
In 2013, mandatory worker representation on French corporate boards was enacted. We examine the way employee directors have been incorporated within the board machinery. Our empirical results indicate that employee representatives have a limited access to board committees. This result casts doubt on the ability of employee directors to significantly influence corporate governance. Consistent with this analysis, we do not find any significant impact, either positive or negative, of codetermination on firm performance.
Participation in global value chains (GVCs) has been proposed as a central means for emerging economies to develop and technologically upgrade. However, the effects of GVCs on income distribution in the global South remain underexplored. This article presents an econometric analysis of the determinants of the labour share in seven emerging economies for the period 1995–2014. Drawing on industry‐level data from global input‐output tables, the authors focus on how GVC participation — in particular offshoring of production from advanced to emerging economies — affects the labour share of different skill groups within manufacturing and service industries. They also estimate the effects of GVCs on productivity, real wages and the capital–value added ratio, to shed further light on the channels through which GVCs affect the labour share. In both industry groups, findings show that integration into GVCs with advanced economies has a negative effect on the labour share in emerging economies, particularly for medium‐skilled workers. In contrast, higher union density and government consumption spending have positive effects on the labour share. Thus, labour in emerging economies loses out relative to capital as production becomes more integrated across borders.
Most explanations for the declining labor share focus on structural changes such as deindustrialization, globalization, financialization, market concentration, and technological change. We argue that these forces operate through a bargaining power channel and that the reduction in the labor share has been driven by lower bargaining power for workers. We first estimate the relationship between the bargaining power and labor's share of income using a bounds-testing approach and find a significant negative relationship. We then create novel indices of structural change and estimate regressions of the cost of job loss, generally finding that increases in structural change have both increased the cost of job loss and amplified its volatility over the business cycle. Our analysis therefore supports the hypothesis that the decline in the labor share is driven by decreased labor bargaining power and suggests that structural economic changes and weak economic performance in the U.S. have increased inequality.
It is frequently asserted that financialisation has contributed to the decline in the wage share. This paper provides a theoretical clarification and a systematic empirical investigation. We identify four channels through which financialisation can affect the wage share: (i) enhanced exit options of firms; (ii) rising price mark-ups due to financial overhead costs for businesses; (iii) increased competition on capital markets and (iv) the role of household debt in increasing workers’ financial vulnerability and undermining their class consciousness. The paper compiles a comprehensive set of empirical measures of financialisation and uses it to test these hypotheses with a panel regression of 14 advanced countries over the 1992–2014 period. We find strong evidence for negative effects of financial liberalisation and financial payments of non-financial corporations on the wage share, which are in the same order of magnitude as the effects of globalisation.
We investigate whether the downward trend in the wage share is driven by technological change or a decline in labour’s bargaining power. We present an econometric analysis using industry-level data for 14 Organisation for Economic Co-operation and Development (OECD) countries for the 1970–2014 period and test whether the determinants of the wage share differ between manufacturing and service industries, between workers of different skill groups and across countries with different bargaining regimes. Our findings suggest that the wage share declined due to a fall in labour’s bargaining power driven by offshoring to developing countries and changes in labour market institutions such as union density, social government expenditure and minimum wages. In contrast, the effect of technological change is not robust. While we find evidence for a negative effect on medium-skilled workers, our results cast doubt on the hypothesis of skill-biased technological change.
The labor share in U.S. manufacturing declined from 61% in 1967 to 41% in 2012. The labor share of the typical U.S. manufacturing establishment, in contrast, rose by over 3 percentage points during the same period. Using micro-level data, we document five salient facts: (i) since the 1980s, there has been a dramatic reallocation of value added toward the lower end of the labor share distribution; (ii) this aggregate reallocation is not due to entry/exit, to “superstars” growing faster, or to large establishments lowering their labor shares, but is instead due to units whose labor share fell as they grew in size; (iii) low labor share (LL) establishments benefit from high revenue labor productivity, not low wages; (iv) they also enjoy a product price premium relative to their peers; and (v) they have only temporarily lower labor shares that rebound after five to eight years. This transient pattern has become more pronounced over time, and the dynamics of value added and employment are increasingly disconnected. Taken together, we interpret these facts as pointing to a significant role for demand-side forces.
Since the late 1990s, over 75% of US industries have experienced an increase in concentration levels. We find that firms in industries with the largest increases in product market concentration show higher profit margins and more profitable mergers and acquisitions deals. At the same time, we find no evidence for a significant increase in operational efficiency. Taken together, our results suggest that market power is becoming an important source of value. These findings are robust to the inclusion of (i) private firms; (ii) factors accounting for foreign competition; and (iii) the use of alternative measures of concentration. We also show that the higher profit margins associated with an increase in concentration are reflected in higher returns to shareholders. Overall, our results suggest that the US product markets have undergone a shift that has potentially weakened competition across the majority of industries.
The labour share of income has been on a downward trend in both advanced and emerging economies. Declining labour shares in emerging economies, though less pronounced, present an important puzzle as they contradict the predictions of classical trade theory. This paper presents a stylized mechanism to reconcile these findings, at the centre of which is routinization, that is, the automation of labour in occupations highly exposed to substitution by computer capital. We assemble a novel dataset and introduce a new measure of the exposure to routinization to analyse the drivers of falling labour shares. While technological progress and exposure to routinization explain over half the overall decline in advanced economies, in emerging markets, the globalization of trade and the accompanying capital deepening are the most significant driver, with technological progress and routinization playing a negligible role.
The last three decades have witnessed rising inequality and deepening financialization in post-industrial democracies. A rapidly growing literature has linked these two phenomena. We go beyond existing scholarship by specifying which aspects of financialization can be expected to increase inequality and where in the income distribution this effect will occur. We also show that this effect is contingent on institutional context. We posit that the shareholder model of corporate governance and the growing demand for financial professionals are the two dimensions of financialization that drive up pre-tax income inequality. Nevertheless, the spread of the shareholder value model only benefits the very top income earners. We further argue that the institutional strength of labor shapes the relationship between financialization and inequality. We analyze effects of indicators of these two dimensions of financialization on the top 1% and the next 9% income shares and on the 90:50 earnings ratio. We test our hypotheses with data on 18 post-industrial democracies between 1960 and 2015.
Using data on the near-universe of US online job vacancies collected by Burning Glass Technologies in 2016, we calculate labor market concentration using the Herfindahl-Hirschman index (HHI) for each commuting zone by 6-digit SOC occupation. The average market has an HHI of 4,378, or the equivalent of 2.3 recruiting employers. 60% of labor markets are highly concentrated (above 2,500 HHI). Highly concentrated markets account for 16% of employment. Labor market concentration is negatively correlated with wages, and there is no relationship between measured concentration and an occupation’s skill level. These indicators suggest that employer concentration is a meaningful measure of employer power in labor markets, that there is a high degree of employer power in labor markets, and also that it varies widely across occupations and geography.
The Belgian labor share, measured as the part of GDP going to labor, is declining. This fits into the global secular trend of decreasing labor shares. A novel strand in the literature focusses on its granular drivers. Recent research in the United States suggests that superstar firms, defined as large firms with a dominant market share, are increasing their market share and relate this to the fall of the labor share (Autor et al. in Q J Econ 135(2):645–709, 2020). Using a long time series of Belgian firm-level data from 1985 to 2014, we provide evidence for the link between the rise of market concentration and the decrease of the labor share in its two largest sectors: Manufacturing and Wholesale & Retail. These two sectors represent approximately half of the Belgian economy. We do not find evidence in other Belgian sectors.
The purpose of this article is to explain the determinants behind the decline of labour share in the last three to four decades in OECD countries. In our view, this decline was determined by financialisation and was deepened by the structural changes that occurred almost simultaneously in those economies. Financialisation, or finance-dominated capitalism, from the 1980s onwards, was a key element in the strategic offensive of the advanced countries' dominant classes to appropriate higher shares of national income and to restore their control over the political process, a control that had been threatened by a generalised advancement of the labour movement in the 1970s. The development of a finance-dominated capitalism was helped by the process of global-isation, which affected not only OECD countries but also many others. A new, though unstable, macroeconomic model emerged, which we will call financial capitalism. In financial capitalism, trade unions lost power vis-à-vis capital, labour flexibility increased enormously, and a structural change from manufacturing to services was accelerated in rich countries. This resulted in negative consequences for labour share and income inequality. After having provided a theoretical discussion of the determinants of the compression of the wage share, making reference to the relevant literature, we submit our hypotheses to empirical scrutiny, performing a panel data analysis on 28 OECD Countries. The results of the estimations provide support to the theoretical argument.
A motivated strategy is presented to find step by step an adequate model specification and a matching set of instrumental variables by applying the programming tools provided by the Stata package Xtabond2. The aim is to implement generalized method of moment techniques such that useful and reasonably accurate inferences can be extracted from an observational panel data set on a single microeconometric structural presumably dynamic behavioral relationship. In the suggested specification search three comprehensive heavily interconnected goals are pursued: (i) to include all the relevant appropriately transformed possibly lagged regressors, as well as any interactions between these, if it is required to relax the otherwise very strict homogeneity restrictions on the dynamic impacts of the explanatories in standard linear panel data models; (ii) to correctly classify all regressors as either endogenous, predetermined or exogenous, as well as being either effect-stationary or effect-nonstationary, implying which internal variables could represent valid and relatively strong instruments; (iii) to enhance the accuracy of inference in finite samples by omitting redundant regressors and by profitably reducing the space spanned by the full set of available internal instruments. For the various tests which trigger the decisions to be made in the sequential selection process the relevant considerations are spelled out to interpret the magnitude of p-values. Also the complexities to estimate and interpret the ultimately established dynamic impacts are explained. Finally the developed strategy is applied to a classic data set and is shown to yield new insights.
Although the aggregate capital share of U.S. firms has increased, capital share at the firm‐level has decreased. This divergence is due to mega‐firms that produce a larger output share without a proportionate increase in labor compensation. We develop a model in which firms insure workers against firm‐specific shocks, with more productive firms allocating more rents to shareholders while less productive firms endogenously exit. Increasing firm‐level risk delays exit and increases the measure of mega‐firms, raising (lowering) the aggregate (average) capital share. An increase in the level of rents magnifies this effect. We present evidence that supports this mechanism.
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This article studies the long-run relationship between the capital share in national income and top personal income shares. Using a newly constructed historical cross-country database on capital shares and top income data, we find evidence on a strong, positive link that has grown stronger over the past century. The connection is stronger in Anglo-Saxon countries, in the very top of the distribution, when top capital incomes predominate, when using distributed top national income shares, and when considering gross of depreciation capital shares. Out of-sample predictions of top shares using capital shares indicates several cases of over- or underestimation.
The fall of labor's share of GDP in the United States and many other countries in recent decades is well documented but its causes remain uncertain. Existing empirical assessments of trends in labor's share typically have relied on industry or macro data, obscuring heterogeneity among firms. In this paper, we analyze micro panel data from the U.S. Economic Census since 1982 and international sources and document empirical patterns to assess a new interpretation of the fall in the labor share based on the rise of \superstar firms." If globalization or technological changes advantage the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms with high profits and a low share of labor in firm valueadded and sales. As the importance of superstar firms increases, the aggregate labor share will tend tofall. Our hypothesis offers several testable predictions: industry sales will increasingly concentrate in a small number of firms; industries where concentration rises most will have the largest declines in the labor share; the fall in the labor share will be driven largely by between-firm reallocation rather than (primarily) a fall in the unweighted mean labor share within firms; the between-firm reallocation component of the fall in the labor share will be greatest in the sectors with the largest increases in market concentration; and finally, such patterns will be observed not only in U.S. firms, but also internationally. We find support for all of these predictions.
Managerial compensation typically relies on financial yardsticks, such as profits, stock prices, and return on equity, to achieve alignment between the interests of managers and shareholders. But financialized governance may not actually work well for most shareholders, and even when it does, significant tradeoffs and inefficiencies can arise from the conflict between maximizing financialized measures and society's broader interests. Effective governance requires that those in control are accountable for actions they take. However, those who control and benefit most from corporations' success are often able to avoid accountability. The history of corporate governance includes a parade of scandals and crises that have caused significant harm. After each, most key individuals tend to minimize their own culpability. Common claims from executives, boards of directors, auditors, rating agencies, politicians, and regulators include “we just didn't know,” “we couldn't have predicted,” or “it was just a few bad apples.” Economists, as well, may react to corporate scandals and crises with their own version of “we just didn't know,” as their models had ruled out certain possibilities. Effective governance of institutions in the private and public sectors should make it much more difficult for individuals in these institutions to get away with claiming that harm was out of their control when in reality they had encouraged or enabled harmful misconduct, and ought to have taken action to prevent it.
Numerous studies have analysed the decline in the labour share of income, but only few have linked it to the increase in financialisation. The process of financialisation can roughly be described as an increasing importance of the financial sector that had an impact on the distribution between wages and profits, on the one hand, and retained earnings and financial income in the form of dividends and interests, on the other hand. This article seeks to explore the relationship between financialisation and labour’s share of income using a time-series cross-sectional dataset of 13 countries over the time period from 1986 until 2007. The results suggest that there is indeed a relationship between increasing dividend and interest payments of non-financial corporations and the decline of the share of wages in national income. Other factors that can account for the decline relate to globalisation and a decrease in the bargaining power of labour.
We examine the determinants of the within-industry decline of the labor share, using industry-level annual data for 25 OECD countries, 20 business-sector industries and covering up to 28 years. We find that total factor productivity growth—which captures (albeit imprecisely) capital-augmenting or labor-replacing technical change—and capital deepening jointly account for as much as 80 % of the within-industry contraction of the labor share. We also find that another factor explaining the aggregate decline of the labor share is the increased international competition, with higher import penetration causing a contraction of the share of labour-intensive industries in total value added. However, the fraction of the drop of the labor share explained by international competition remains limited.
Wage shares have declined substantially in all OECD countries and most developing economies since 1980. This study uses a new ILO/IILS dataset on adjusted wage shares for a panel of up to 43 developing and 28 advanced economies (1970-2007) to explain changes in wage shares and assess the relative contributions of technological change, financialization, globalization and welfare state retrenchment. We find strong negative effects of financialization as well as negative effects of welfare state retrenchment. Globalization has (in production) robust negative effects in advanced as well as in developing economies, which is at odds with the Stolper-Samuelson theorem. We find small, and for developing countries positive effects of technological change. Our results support a Political Economy approach to explaining income distribution.
Using firm-level data for the period 2004 to 2013, this article examines the connection between the financialization of French corporations and functional income distribution in the non-finance sector of the economy. Financialization of French non-financial corporations has increased their dependence on earnings through financial channels, and diminished labor bargaining power in income distribution. We examine the effects of these financial revenues on wage share using a panel data model of 6980 French non-financial firms. We conclude that increased dependence on financial profits is likely to decrease wage share in non-financial corporations. Moreover, this variable is more influential in our model than the other variables usually identified by the literature as determinants of functional income distribution, such as trade openness or labor market institutions. Of the determinants traditionally emphasized by the literature, only technological change has a greater impact than financialization.
This article addresses an important trend in contemporary income inequality-a decline in labor's share of national income and a rise in capitalists' profits share. Since the late 1970s, labor's share declined by 6 percent across the U.S. private sector. As I will show, this overall decline was due to a large decline (5 to 14 percent) in construction, manufacturing, and transportation combined with an increase, albeit small (2 to 5 percent), in labor's share within finance and services industries. To explain the overall decline and the diverse trends across industries, I argue that the main factor leading to the decline in labor's share was the erosion in workers' positional power, and this erosion was partly an outcome of class-biased technological change, namely computerization that favored employers over most employees. I combine data from several sources to test for the independent effects of workers' positional power indicators (i.e., unionization, capital concentration, import penetration, and unemployment) and the direct and indirect effects of computer technology on changes in labor's share within 43 nonagricultural private industries and 451 manufacturing industries between 1969 and 2007. Results from error correction models with fixed-effect estimators support the study's arguments.
In this article a major channel through which financialisation or finance-dominated capitalism affects macroeconomic performance
is examined: the distribution channel. Empirical data for the following dimensions of (re-)distribution in the period of finance-dominated
capitalism since the early 1980s is provided for 15 advanced capitalist economies: functional distribution, personal/household
distribution and the share and the composition of top incomes. Based on the Kaleckian approach to the determination of income
shares, the effects of financialisation on functional income distribution are studied in more detail. Some stylised facts
of financialisation are integrated into the Kaleckian approach, and by means of reviewing empirical and econometric literature
it is found that financialisation and neoliberalism have contributed to the falling labour income share since the early 1980s
through three main Kaleckian channels: 1) a shift in the sectoral composition of the economy, 2) an increase in management
salaries and rising profit claims of the rentiers and thus in overheads, and 3) weakened trade union bargaining power.
The stability of the labor share of income is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined since the early 1980s, with the decline occurring within the large majority of countries and industries. We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced firms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares, such as increasing profits, capital-augmenting technology growth, and the changing skill composition of the labor force. We highlight the implications of this explanation for welfare and macroeconomic dynamics. JEL Codes: E21, E22, E25.
The income distribution between capital and labour is understudied within industrial relations. This article investigates the relationship between union density, taken as an indicator of the bargaining power of unions, and the wage share of national income in 16 advanced capitalist economies since 1960. It is shown that overall there is a positive relationship between union density and the wage share, as one would expect. But the relationship is weak or non-existent in the Nordic countries, and in some specifications in Germany and Anglo-Saxon countries, and overall it is weak in the 1980s and early 1990s. The article discusses the differences between countries in relationship to the literature on corporatism and wage moderation, and the decreasing effect over time with reference to increased global competition and conservatism of monetary policy from about 1980 on, increasing unions' incentives for wage moderation policies.
The global financial crisis has brought discussion of financialization to the fore. Yet, what is notable is the extent to which the dysfunctional micro-economic consequences of financialization at firm level have gone largely unremarked and unchanged. By revisiting and renewing the disconnected capitalism thesis, this article seeks to rectify the omission of a focus on financialization and the workplace and develops a complex and nuanced bigger picture that explores in some detail changes in accumulation, corporate, work and employment domains. The dual objective is thus to understand the dynamics and drivers of such changes and to identify the extent to which financialization has shaped them. In identifying patterns of connection and disconnection across and within domains, a recurrent theme concerns financialization interacting with, accelerating and exacerbating longer term trends such as labour market insecurity, externalization and internationalization.