What's behind falling wage shares? The role of financialisation, globalisation, welfare state

retrenchment and technological change – A post-

Keynesian view

Bank of Lithuania, Vilnius, Oct 2017

Engelbert Stockhammer

Kingston University London

Stockhammer, E, 2017. Determinants of

the wage share. A panel analysis of

advanced and developing economies.

British Journal of Industrial Relations 55,

1: 3-33

M. Lavoie and E. Stockhammer (eds): Wage-led growth. An Equitable Strategy for Economic Recovery (Palgrave 2013)

• Wage-led growth: Concept, theories and policies – M. Lavoie and E. Stockhammer

• Why have wage shares fallen? An analysis of the determinants of functional income distribution – E. Stockhammer

• Is aggregate demand wage-led or profit-led? a global model – Ö. Onaran and G. Galanis

• Wage-led or Profit-led Supply: Wages, Productivity and Investment – S. Storm and C.W.M. Naastepad

• The role of income inequality as a cause of the Great Recession and global imbalances – T. van Treeck and S. Sturn

• Financialisation, the financial and economic crisis, and the requirements and potentials for wage-led recovery – E. Hein and M. Mundt

3

Motivation

• Since early 1980 dramatic changes in income distribution → lit on personal income distr

• wage shares have been falling • Well documented for OECD countries, less so for developing economies

• Until recently little research, then a series of publications on OECD countries, ... but little on functional distribution in developing countries

• Elephant in the room: is the change income distribution an optimal adjustment to market signals ... or a reflection of changing power relations

• ILO project on ‚wage-led growth‘

• Aim of paper: identify the relative impacts of financialisation, globalisation, technological change and welfare state retrenchment

• Panel 71 countries (28 ADV, 43 DVP), max1970-2007 (in fact: mid 80s-early 2000s) • Panel of ALL as well as developing (DVP) economies

• Panel for ADV

4

Mainstream story

• IMF (2007a, p. 161) • globalization is one of several factors that have acted to reduce

the share of income accruing to labor in advanced economies, although rapid technological change has had a bigger impact (…) .

• countries that have enacted reforms to lower the cost of labor to business and improve labor market flexibility have generally experienced a smaller decline in the labor income share.

• EC (2007, p. 260) • “for the period for which the data is available (i.e. from the mid-

1980s to early 2000s), the estimation results clearly indicate

• that technological progress made the largest contribution to the fall in the aggregate labour income share“

• “Globalisation also had a negative impact on the aggregate labour income share but to a lesser extent”

outline

• framework

• Literature

• Data

• Results

• ALL, DVP

• ADV

• Some further results on financialication

• conclusion

5

Adjusted Wage Share in advanced

(ADV) economies

6

60,0

65,0

70,0

75,0

80,0

85,0

1970 1980 1990 2000 2010

ADV

JPN

USA

DEU

Adjusted Wage Share in developing

(DVP) economies

7

50,0

55,0

60,0

65,0

70,0

75,0

1970 1980 1990 2000

DVP3

DVP5

DVP16

Personal income distribution USA

Correlation top1% and WS

9

AUS -0.68 FIN -0.72 ARG -0.86

CAN -0.43 FRA -0.61 CHN -0.83

IRL -0.76 ITA -0.83 IDN -0.14

GBR -0.71 NLD 0.46 IND -0.18

USA -0.80 PRT -0.15 ZAF -0.67

ESP -0.16

SWE -0.54

JPN -0.30

Framework and comments on

the literature

10

Literature on income distribution

• Lots of research on personal distribution • Mostly on advanced economies; labour econ and trade theory, often micro

(Piketty, Saez, Atkinson...)

• Few that combine cross country and time

• Some lit on developing countries (Goldberg and Pavcnik 2007 JEL)

• Until recently little on functional distribution • Then a series of publications (EC 2007, IMF 2007, OECD 2007) on OECD

countries

• Smaller literature on developing countries • Includes capital account liberalisation prominently

• Literature in social sciences that emphasises power relations (welfare state, unions)

• Barkai (2017): capital share ≠ profit share; concentration (market power) !

• Daudey and Garcia-Penalosa (2007) negative correlation between changes in personal and functional income distribution (for large sample)

Literature on functional income

distribution

• Contribution:

• rich dataset (adv + dvp countries)

• Integrates insights from all four streams

• Private, adjusted WS as dependent variable

Main factor Other factors Dep var Sample

Mainstream economics

Tech + glob LMI Adj WS Adv

PE of globalisation

glob Tech WS Adv + dvp

Political sciences

Wfst (power) Glob Adj WS Adv

financialisation fin Tech, glob Adj WS adv

12

13

14

15

IMF (2007a), Jayadev (2008)

IMF (2007a)

• Estimates adj WS = f(Glob, K/L, ICT, TW, UB) • Glob: Px, Pm, offshoring, imigration

• 18 OECD countries 1983-2002, annual data

• Panel (OLS with some robustness checks)

• Story: decline in WS most of all caused by tech change, globalization contributed to decline in WS • Then disaggregate for skilled WS and unskilled WS

Jayadev (2008)

• WS = f(Ypc, CA openness [legal], trade openness, tariffs, int, gov’t share)

• 62-89 countries

16

Main factors in the literature

• Technological change

• Globalisation

• Financialisation

• Welfare state retrenchment (or ‘bargaining

power’, LMI)

17

Technological change

• Argument come from discussion of personal distribution • Tech change, in particular ICT favors skilled workers

(complements to ICT) and hurts unskilled workers (substitutes of ICT)

• Overall this leads to a fall in the wage share

• Tech change partly implemented through outsourcing

• Variables in empirical research • K-L ratio (Bentolila and Saint-Paul 2003)

• Time trends (Ellis and Smith 2007, Guscina 2006: after 1985)

• K-L ratio and ICT: IMF (2007a, EC 2007)

• P of inv goods and elast of subst > 1 (Karabarbounis and Neimann 2013; IMF 2017: sectoral data)

• Criticms of identification of production functions (McCombie and Felipe 2013)

18

Globalisation: Stolper-Samuleson vs

Political Economy approach • Stolper-Samuelson: changes of relative prices of labor and capital;

abundant factor wins • Outsourcing as a particular form of it

• ≠ bargainging: mobile factor wins, threat effects (Rodrik)

• General econ perception at odds with specialized literature • Problems of SS & HO: comparative advantage can‘t explain actual trade pattern; assumes

full employment, homog labour ...

• Stolper-Samuleson predicts positive effect of globalisation on WS in developing economies

• but globalization led to increased inequality in developing economies (Goldberg and Pavcnik 2007 JEL)

• Rodrik, Harrison, Jayadev find negative effect on WS in developing countries

• variables • Trade openness (EC 2007)

• FDI, outsourcing, ToT (IMF 2007a)

• Tariffs (IMF 2007b, Rodrik 1998)

19

Financialisation

• Increasing importance of financial sector and financial investors („shareholder value orientation“)

• has shifted power relation at the expense of labor: • Increased exit options for firms (capital mobility)

• Shareholder valure -> higher payouts -> squeeze on wages • Ex: Private Equity firm buys industrial firm with debt, loads debt onto firm ->

firm has to cut costs to survive. ILO (2008), Rossman (2009):

• Shift in managagment priorities: has decreased investment -> unemployment

• Stockhammer (2004), Lazonick and O‘Sullivan (2000): from ‚retain & reinvest‘ to ‚downsize & distribute‘

• variables • So far not included in econometric studies on the determinants of

the wage share

• IMF (2007b): effect of financial globalization on personal income distribution

• Cap Account openness (Jayadev 2007)

20

ILO 2008 World of Word Report

• “financial liberalization that has contributed to growing inequality in some industrialized countries is the even greater importance attached to “shareholder value” maximization and to private equity funds in corporate management. The demand for higher dividend payouts by active shareholders has made managers more resistant to claims for wage increases than in the past, while the threat of outsourcing and downsizing has weakened the bargaining position of workers” (ILO 2008, p. 50)

21

Welfare state retrenchment

• Welare state increases bargaining power of labour • Effect on wages depends on elastisticy of labor demand

• Political science literature on ‚welfare state retrenchment‘

• In PolSci interpreted as power variables

• Variables • union density, various LMI (IMF 2007a, EC2007)

• LMI have ‚perverse‘ effect, implying very elastic labor demand

• LMI: lab mkt flex or bargaining power?

• Gov’t share (Jayadev 2007)

• strike (Bentolila and Saint-Paul: national variable in a sectoral panel)

• Kristal (2010): unions, strike, left govt, civilan govt spending

22

Determinants of income distribution

23

Are changes in

distribution due to

optimal

adjustements or

power relations?

• power over

consumers

(market power)

• power over

workers

(outsourcing)

Overview baseline variables

WS = f(fin, tech, wfst, glob)

ALL/DVP ADV

financialisation FINGLOB FINGLOB

globalisation OPEN OPEN ToT

Welfare state CG CG UNION

Technological change

GDPpw IND AG

KL ICT

24

Data

Results for ALL countries

Results for ADV countries

25

Baseline specification (ALL

countries)

• Baseline equation (ALL countries):

WS = f(∆y, FINGLOB, OPEN, GOVT, Y/L, IND, AG)

• Variables for

• Globalisation: OPEN

• Financialisation: FINGLOB

• Technological + structural change: Y/L, IND, AG

• Welfare state retrenchment: LMI, gov’t

26

Wage share (WS) adjustments

• Problem: self employment, informal sector

• Adjusted WS: imputes formal wages to self employed

• Some recommend: average between adj WS and WS

• Further adjustments: keeping sectoral composition

constant (or at US levels), Kruger (1999), Gollin (2002)

• Note: I don’t do adjustments (or not) myself

• Private wage share (WSP)

• WS = (1- CG)*WSP + CG*WSG

• WSP = (WS-CG)/(1-CG)

27

Data & sources WSAP Adjusted private wage share (1) AMECO, (2) ILO, (3) national

∆y growth WB WDI

FINGLOB Financial globalisation

(Aext+Lext)/Y

IMF (Lane & M-F 07)

OPEN Openness (X+M)/Y WB WDI

ToT Terms of trade (1) AMECO, (2) IMF

CG Gov‘t consumption PENN

UNION Union density BD + BGHS

GDPpw GDP per worker PENN

AG Agricultural share PENN

ICT ICT services/Y KLEMS (ADV); ALL: Groningen

KL Capital labour ratio KLEMS

28

29

30

Robustness tests

• WS = f(∆y, finglob, open, govt, Y/L, ag, ind) • Obs 1450 (dvp 614)

• Estimation method • Fixed effects model: (annual) levels + autocorr correction

• First differences (annual)

• Non-overlapping 5 yr averages (NO5YA)

• GMM

• Results by country groups (ADV vs DVP)

• Robustness checks • Finref

• Other fin

• LMI

• Glob

• By income group

31

Baseline specification

(ALL and DVP), dep var: WSAP

32

sample ALL DVP

coeff t-value coeff t-value

GROWTH -11.94 -4.17*** -13.85 -3.47***

LOG(FINGLOB) -3.66 -6.99*** -4.70 -5.30***

OPEN -3.81 -3.21*** -4.07 -2.38**

LOG(GDPPW) -0.69 -0.32 0.53 0.27

CG 0.80 3.97*** 0.79 3.07***

AG -0.24 -2.72*** -0.21 -2.12**

IND -0.16 -2.46** -0.03 -0.30

obs 1450 595

adj r2 0.98 0.98

dw 1.72 1.78

Table 3. Results for the baseline specification and variations

33

1 2 3 4 5 6 7 8 9 GROWTH -11.94 -11.97 -12.32 -11.19 -11.60 -16.09 -9.91 -13.98 -20.58 LOG(FINGLOB) -3.66 -3.68 -4.38 -3.05 -3.56 -2.55 -3.73 -3.25 -2.70 OPEN -3.81 -4.02 -3.82 -6.23 -3.56 -5.78 -3.90 -3.91 -6.41 LOG(GDPPW) -0.66 -0.67 -1.16 -2.36 -4.10 -2.83 -0.62 -0.83 -6.38 CG 0.80 0.80 0.80 0.39 0.95 -0.05 0.82 0.73 -0.25 AG -0.24 -0.24 -0.23 -0.14 -0.34 -0.42 -0.24 -0.24 -0.53 IND -0.16 -0.16 -0.15 -0.26 -0.18 -0.34 -0.16 -0.15 -0.47 OPEN*D_HIGHIN 0.51 2.71 LOG(FINGLOB)*D_HIGHIN 1.24 0.34 TOT -4.22 -4.78 UNEMPL -0.32 -0.39 LOG(ICT_CB) 0.26 0.04 D_CRISIS 0.88 0.26 D_EXCRIS -1.42 -1.46 obs 1450 1450 1450 1310 1302 664 1450 1427 629 adj r2 0.98 0.98 0.98 0.98 0.98 0.98 0.98 0.98 0.98 dw 1.72 1.72 1.72 1.68 1.74 1.70 1.71 1.69 1.83

Table 10. Baseline specification and different estimation methods – adv countries

34

1 2 3 4 5 6 7 8

FE diff 5yr GMM FE diff 5yr GMM

lag.dep.var 0.479 0.293

GROWTH -16.434 -11.044 -75.851 -25.229 -16.27 -12.153 -70.857 -11.836

LOG(FINGLOB) -2.418 -1.286 -6.199 -1.185 -2.14 -0.906 -6.203 -2.45

OPEN -5.888 -8.095 4.32 3.504 -6.566 -7.778 1.992 -8.478

TOT -4.546 -3.256 1.391 -3.603 -4.662 -3.033 -0.045 -9.81

CG 0.929 1.483 -1.034 0.558 1.255 1.72 -0.815 1.358

UNION 0.099 0.023 0.115 0.307 0.135 0.056 0.14 0.495

LOG(KL_KLEMS) -7.034 -4.136 -5.932 -5.582 -0.162 1.148 -4.015 9.579

LOG(ICT_KLEMS) 1.436 3.596 1.775 -0.178 0.141 2.823 1.633 -2.729

UNEMPL -0.322 -0.344 -0.249 -0.826

obs 470 470 87 460 470 470 87 460

adj r2 0.94 0.417 0.909 NA 0.944 0.449 0.916 NA

dw 1.814 1.817 1.976 NA 1.884 1.784 2.048 NA

Table 8. Results with financial reform variables

35

1 2 3 4 5 6 7 8 GROWTH -11.94 -12.75 -12.16 -12.37 -12.03 -12.33 -12.21 -12.14 LOG(FINGLOB) -3.66 -3.48 -3.58 -3.60 -3.60 -3.63 -3.59 -3.42 OPEN -3.81 -5.03 -4.95 -5.03 -5.02 -5.01 -5.09 -5.03 LOG(GDPPW) -0.66 -3.02 -3.07 -2.89 -2.77 -3.04 -2.87 -2.51 CG 0.80 0.64 0.66 0.67 0.69 0.67 0.67 0.67 AG -0.24 -0.28 -0.26 -0.26 -0.26 -0.25 -0.26 -0.28 IND -0.16 -0.18 -0.17 -0.17 -0.17 -0.17 -0.17 -0.17 FINREF_CC -0.66 FINREF_IRC -0.21 FINREF_EB -0.11 FINREF_PRIV -0.30 FINREF_ICF 0.08 FINREF_SM -0.41 FINREF_XN -3.10 obs 1450 1177 1177 1177 1177 1177 1177 1177 adj r2 0.98 0.98 0.98 0.98 0.98 0.98 0.98 0.98 dw 1.72 1.66 1.66 1.66 1.66 1.66 1.66 1.65

Table 9. Results with labour market institutions variables

36

1 2 3 4 5 6 7 8 GROWTH -11.94 -13.28 -12.30 -12.55 -12.34 -12.30 -12.79 -11.88 LOG(FINGLOB) -3.66 -3.14 -2.75 -2.82 -2.69 -2.71 -3.15 -3.42 OPEN -3.81 -3.16 -4.68 -3.84 -4.78 -4.80 -3.68 -3.78 LOG(GDPPW) -0.66 -2.56 -1.52 -2.09 -2.02 -1.99 1.20 -0.25 CG 0.80 0.62 0.62 0.43 0.56 0.57 0.77 0.80 AG -0.24 -0.35 -0.29 -0.33 -0.29 -0.28 -0.25 -0.26 IND -0.16 -0.10 -0.22 -0.18 -0.22 -0.22 -0.19 -0.17 MW_MNW -0.48 UB_GRR1 -2.51 UB_COVERAGE 0.51 EPL_AN4Y -1.22 EPL_SP4Y 0.08 LOG(LF) 5.00 LOG(POP) -9.75 obs 1450 718 1007 878 1026 1026 1242 1450 adj r2 0.98 0.97 0.98 0.98 0.98 0.98 0.98 0.98 dw 1.72 1.66 1.72 1.69 1.70 1.71 1.74 1.72

Other variations

• IMF LMI dataset (minW, UB, EPL)

• Nothing

• IMF financial reform (8 variables)

• Globalisation

• X have neg, M have pos effect

• FDI: no effect

• Priv credit, interest rate: some pos effect

37

Contributions to changes in the wage

share, ALL countries, 1990/94-2000/04

38

-2

-1,5

-1

-0,5

0

0,5

1

Fin glob tech wfst

Contributions to change in the wage share 1990/94 to 2000/04

Contributions by estimation method

39

-2

-1,5

-1

-0,5

0

0,5

1

1,5

2

Fin glob tech wfst

Contributions to the change in the wage share in different specifications 1990/94 to 2000/04

FE

diff

5yr

GMM

Contributions to the change in the wage share,

developing economies, 1990/94-2000/04

40

-1,5

-1

-0,5

0

0,5

1

fin glob tech wf.st

Series1

Baseline specification (ADV)

• Baseline equation (advanced ADV countries):

WS = f(∆y, FINGLOB, TOT, OPEN, govt, UNION,

K/L, ICT)

• Variables for

• Globalisation: OPEN, TOT

• Financialisation: FINGLOB

• Technological + structural change: Y/L, ICT

• Welfare state retrenchment: gov’t, UNION

41

Baseline specification (ADV)

42

coeff t-value

GROWTH -16.43 -5.22***

LOG(FINGLOB) -2.42 -3.37***

OPEN -5.89 -3.21***

TOT -4.55 -2.57**

CG 0.93 3.84***

UNION 0.10 1.78*

LOG(KL_KLEMS) -7.03 -1.82*

LOG(ICT_KLEMS) 1.44 1.64

obs 470

adj r2 0.94

dw 1.81

43

-3,5

-3,0

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

fin glob tech wfst

Contributions to the change in the wage share, advanced countries 1980/84-2000/04

An extension: more on the

effect of financialisation

44

• Kohler, Guschanski & Stockhammer (2017) How

does financialization affect functional income

distribution? A theoretical clarification and

empirical assessment,

• Similar framework, focus on different channels

by which financialisation impacts on distribution

• 14 OECD countries, 1989-2014

Channels by which financialisation

affects income distribution Mechanism Theoretical

foundation

Empirical studies Empirical measures

used

Proposed measures

Enhanced exit

options for NFCs

Theories of bargaining

power

Jayadev (2007),

Stockhammer (2009,

2013),

ILO (2011), Lin and

Tomaskovic-Devey

(2013)

Financial openness

Financial

globalisation

Financial profits of

NFCs to business

profits

Financial openness

(legal measure)

Financial

globalisation

(economic measure)

Financial income of

NFCs

Increasing financial

overhead costs for

NFCs and flexible

mark-up

Neo-Kaleckians Hein and Schoder

(2011),

Dünhaupt (2016)

Interest payments of

NFCs

Dividend payments of

NFCs

Financial payments of

NFCs

Increased competition

on capital markets

put pressure on NFCs

Neo-Marxists;

Corporate governance

literature

Stock market turnover

Household debt and

financial vulnerability

of workers

Not clear: neo-

Sraffians, Cultural

Political Economy

Household debt

46

Main findings

• Find support for bargaining approach: ‘exit

options’ (capital mobility, finaglob) and financial

payment (interest and dividend payments)

• Confirm role of union density and trade

globalisation

• Fail to find effect of migration

47

Conclusion

48

Conclusion

• Main causes of changes in income distribution • financial globalization and welfare state retrenchment as

main causes for decline in wage share

• Developing economies: similar to ADVs • Globalisation and financial globalisation have negative

effects on WS – opposite to what Stolper & Samuelson predict

• Positive effect of technological change

• Unemployment has weaker effects

• Advanced economies (ADVs) • financial globalization and welfare state retrenchment as

main causes for decline in wage share

• Moderate negative effects of technological change

49

Policy implications

• Financialisation is not distributionally neutral

• Consider de-financialisation: tightening financial regulations, capital account management • Also desirable from a macroprudential view

• Globalisation is not distributionally neutral • Needs to be compensated by strengthening labour market

institutions

• Have to address power of big corporation: competition policy, countervailing power (labour unions, civil society (stakeholders)

• Public misperception: labour mobility (migration) is to blame; in fact it’s capital mobility

50

Policy implications

• Part of project on ‘potentials of wage-led growth’

• Neoliberalism has given rise to debt-led or export-led growth regimes (Lavoie and Stockhammer 2012; Hein 2012). • Both rely on wage suppression

• Both are economically unstable and socially unbalanced

• Explore macroeconomic potential of wage-led growth • Positive effects on demand (Onaran and Galanis 2012)

• Positive effects on productivity (Storm and Naastepad 2012)

• To increase wage share: tackle financialisation and strengthen the welfare state (role of unions)

51