The Labour Share of Income, Globalisation and Democracy: A Cross-Country Analysis

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Abstract

This thesis aims at explaining over-time and cross-country variations in functional income distribution. The methodology used is based on cross-country panel data econometric analysis on the determinants of the labour share of income. The results, contributing to the general understanding of the causes of income inequality, are particularly relevant for developing countries and useful to device adequate pro-poor and pro-labour policies. The three main contributions are summarised below.1. The Labour Share of Income around the World. Evidence from a Panel Dataset: Two fundamental reasons can be identified as to why factor shares have been downplayed in the economic literature: first, because of their nature, they are difficult to define and measure; second, they have for a long time been perceived as constant across time and space. An adjustment to the usual approaches of measurement is suggested in order to compile an extensive dataset of the labour share across 89 countries - both developing and developed - for all or part of the period 1970-2009. Results show that the measure, when compared to other five measures previously used in the literature, is correlated but non-redundant. Contrary to the traditional assumption of stability of factor shares, the data present evidence of considerable variability. Specifically, there seems to be a general reduction in the labour share around the world, in particular from the mid-1980s onwards.2. Revisiting the Evidence on International Trade, Technological Change and Labour: Fixed effects regression methods are used to examine the short-run mechanisms underlying the variability in the labour share. In particular, the focus is on the relationships between the labour share and measures of international trade and technological change. The results are robust across different specifications, for yearly data as well as 3- and 5- year averages, and after performing instrumental variable estimation. They suggest that trade openness and technological innovation have a positive and significant effect on the labour share. However, Foreign Direct Investments inflows and mechanisation seem to be negative drivers. Moreover, other factors, such as the level of economic development, education, and the strength of the regulations in the labour market, seem to also significantly influence functional distribution of income. Much of the variation in the labour share, however, remains unknown.3. How Does Democracy Promote the Labour Share of Income? Summary statistics on the labour share show that between-variation is much greater than within-variation: functional income distribution is determined by factors which change substantially across countries but tend to be relatively stable within countries. The thesis tries to shed some light on the long-run and political economy determinants of the labour share of income. The core of the empirical analysis consists of a set of cross sectional (5-year averages) regressions in which the labour share is regressed on democracy measures: robust evidence shows that democratic political systems allow workers to appropriate a higher share of national income. Moreover, there is evidence that democratic institutions generate higher labour shares because of the creation of more pro-worker policies and because of the promotion of income redistribution.

Keyword(s)

democracy; globalisation; income distribution; labour share

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