DETERMINANTS OF LABOUR SHARE OF INCOME

Abstract

There is widespread view that globalization and its attendant developments have been favouring capital over labour and as a result labour share of income is decreasingly over time. The thesis studies the determinants of labour share of income and finds rather strong evidence that labour share has been decreasing from 1994 to 2008. This study examines how the elasticity of substitution between factors, factor accumulation, and the direction of technological progress affects labour share in a neoclassical framework. This study finds that all country groups have been experiencing positive growth in capital-intensity and the domination of labour-augmenting technological progress. Using within fixed-effects model, this study proceeds to explore other factors — structural, globalization, labour market institutions, and operating environment changes which can plausibly provide additional explanatory power to movements in labour share. The static fixed-effects model is augmented with the dynamic lagged dependent model for higher income sub-sample. Overall, the empirical results suggest that changes in factor shares are primarily linked to changes in capital-labour ratio. With elasticity of substitution less then unitary, labour share increases with higher capital-labour ratio. Structural transformation involving a shift to service sector is associated with increase in labour share in both higher and lower income countries. Greater share of exports is negatively associated with labour share, suggesting that firms' improved ability to sell their products abroad may come from the suppression of wages to enhance their export competitiveness. Furthermore, this study finds that institutions do matter. Lower degree of wage regulation, which proxies for lower bargaining power of workers, is associated with lower labour share; very good investment protection schemes is also negatively associated with labour share.