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Determinants of the Wage Share: a Cross-Country Comparison Using Sectoral Data

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Determinants of the Wage Share: a Cross-Country Comparison Using Sectoral Data A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Guschanski, Alexander; Onaran, Özlem Article Determinants of the Wage Share: A Cross-country Comparison Using Sectoral Data CESifo Forum Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Suggested Citation: Guschanski, Alexander; Onaran, Özlem (2018) : Determinants of the Wage Share: A Cross-country Comparison Using Sectoral Data, CESifo Forum, ISSN 2190-717X, ifo Institut - Leibniz-Institut für Wirtschaftsforschung an der Universität München, München, Vol. 19, Iss. 2, pp. 44-54 This Version is available at: http://hdl.handle.net/10419/181209 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu FOCUS Alexander Guschanski and the EU and the United States. Our sample allows to Özlem Onaran assess how the effect of labour market institutions on the wage share depends on the underlying Determinants of the Wage bargaining regime. Furthermore, while industry level Share: A Cross-country data on FDI or intermediate imports does not allow for a differentiation between market or cost seeking Comparison Using Sectoral activities, we can analyse whether trade in a particular 1 Data country is more of a market seeking or cost seeking nature by conducting country-specific estimations.2 Previous contributions mainly focus on either the technological change or the bargaining power hypothesis. The previous research focusing on the impact of bargaining power on the wage share uses INTRODUCTION mostly aggregate country level panel data, which does not differentiate the results across skill groups There has been a significant decline in the share of and industries (ILO 2011; Jayadev 2007; Kristal 2010; wages in GDP in both developed and developing Onaran 2009; Stockhammer 2009 and 2017). Within countries since the 1980s. This paper analyses the the literature that argues the primacy of technological determinants of the wage share (labour compensation change, Bassanini and Manfredi (2014), Karabarbounis as a ratio to value added) for the 1970–2011 period and Neiman (2014), and IMF (2017) use industry as well using sectoral data with country specific estimations as country panel data; however they barely control for Alexander Guschanski University of for six OECD countries: France, Germany, Italy, Spain, variables reflecting the bargaining power of labour and Greenwich Britain, and the United States. labour market institutions, welfare state retrenchment There are two main hypotheses put forward to or financialisation.3 Guschanski and Onaran (2017a, explain the decline in the wage share: the technological 2017b and 2018) provide a comprehensive analysis change hypothesis posits that the labour share declined of both hypotheses. However, they pool countries due to capital augmenting technological change or an (Guschanski and Onaran 2017a and 2017b), or use increase in the capital intensity of production. The firm-level data (Guschanski and Onaran 2018). Lin and bargaining power hypothesis attributes the decline in Tomaskovic-Devey (2013), and Onaran (2011 and 2012) the labour share to a decline in the bargaining power are closest to our analysis, but while these studies of labour, induced by changes in government policy, focus on a single country, the United States and Austria labour market institutions or financialisation. We respectively, we perform our analysis for six OECD Özlem Onaran University of argue that the relevance of these factors differs across countries, control more thoroughly for measures of Greenwich countries along three lines: technological change and incorporate a broader range of explanatory variables. 1. The relevance of labour market institutions Our findings provide new insights regarding the depends on the bargaining regime. For example, drivers of the falling wage share. We confirm previous union density is likely to be particularly relevant research based on the analysis of country-level in countries with highly coordinated bargaining panel data attributing the decline in the wage share regimes, whereas bargaining coverage and social to a decline in bargaining power of labour driven by government expenditure is potentially more changes in labour market institutions, financialisation relevant in a decentralised bargaining environment. and globalisation. However, we find that these factors 2. The effect of globalisation on the wage share impact countries and skill groups within countries depends on whether market or cost seeking differently, thereby confirming the upmost relevance activities dominate, which is likely to differ by of country specific institutional setting in determining country and industry group. income distribution. Specifically, we find that union 3. The effect of technology might differ depending on density is the most relevant measure of the bargaining the production structure in the economy, the type power of labour in highly coordinated bargaining of goods the country specialises in, as well as across 2 Furthermore, while country-level analysis always faces the ques- high- and low-skilled sectors. tion as to whether the decline in the wage share captures changes in the sectoral composition rather than a decline of the wage share within sectors, we are able to isolate the within sector development Previous research either focuses on one individual of the wage share, while abstracting from changes in the sectoral country or uses panel data that pools countries, which composition. Indeed, we find that the wage share declined within the large majority of industries in our sample, including within high- does not offer a satisfactory account for country- and low-skilled sectors. This confirms previous findings by Kara- specific differences. Our contribution consists in barbounis and Neiman (2014); and Rodriguez and Jayadev (2010), attributing the decline in the wage share mainly to within-industry providing country-specific estimations using an changes. industry-level dataset for the largest economies in 3 IMF (2017) controls for union density, employment protection legislation and corporate taxation at the country level in some sec- 1 This paper has received a research grant from the Institute for tor level estimations for different skill groups, while Bentolila and New Economic Thinking. The usual disclaimers apply. Saint-Paul (2003) control for the strike rate at the country level. 44 CESifo Forum 2 / 2018 June Volume 19 FOCUS Table 1 regimes (Germany, Italy, Table 1 Spain), while collective bar- Different Elasticities of Substitution between Capital and Labour and the Effect of gaining coverage and social Technological Change on the Labour Share Effect of capital intensity and capi- government spending is Elasticity of tal augmenting technological Description more important in countries substitution change on the wage share where firm-level bargaining K and L are strong substitutes dominates (France, Britain, the > 1 < 0 technological change has a United States). Financialisation negative impact reduced the bargaining power Unitary elasticity (Cobb-Doug- of labour mainly in Britain and = 1 = 0 las production) no impact the United States, and to some of technological change K and L are weak substitutes extent in Germany. Different < 1 > 0 technological change has a measures of globalisation had positive impact an impact on the wage share Source: Authors’ own compilation. in all countries. Although we also find some evidence for a negative impact of It is usually assumed that capital is a substitute technological change in the United States, Italy and for low-skilled labour, whereas it complements high- Spain, our results indicate that the decline in the wage skilled labour – therefore we expect a negative effect in share is not an inevitable outcome of technological the former and a positive effect in the latter case. progress. Rather, reversing the decline in the wage The ratio of capital to value added, often share requires institutional changes that bring the differentiated by ICT and non-ICT capital, is usually bargaining power of labour more in balance with that applied as a measure of technological change in the of capital. literature. Most prominently, Karabarbounis and The remainder of the paper is organised as follows. Neiman (2014) provide evidence for a negative effect of The second section provides a review of the literature technological change on the wage share and
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