Determinants of the Wage Share: A Panel Analysis of Advanced and Developing Economies

Published date01 March 2017
Date01 March 2017
DOIhttp://doi.org/10.1111/bjir.12165
British Journal of Industrial Relations doi: 10.1111/bjir.12165
55:1 March 2017 0007–1080 pp. 3–33
Determinants of the Wage Share:
A Panel Analysis of Advanced and
Developing Economies
Engelbert Stockhammer
Abstract
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 changesin wage shares and assess the relative
contributions of technological change,financialization, globalization and welfare
state retrenchment. We find strong negative eects of financialization as wellas
negative eects of welfare state retrenchment.Globalization has (in production)
robust negative eects 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 eects of technological change. Our results support a Political
Economy approach to explaining income distribution.
1. Introduction
The past 30 years haveseen dramatic changes in income distribution, with top
incomes, in particular in the USA, rising to levels unseen in two generations
(Piketty and Saez 2003) and wage shares falling substantially since about
1980 across all OECD countries. This has led to a renewed interest in the
determinants of the distribution of income. Changes in personal income
distribution have had more prominence (Atkinson et al. 2011; Autor et al.
1999; OECD 2011), but there is also an increasing interest in the determinants
of functional income distribution. The literature here falls into fourrelatively
independent groups. First, mainstream (modern neoclassical) economics
contributions argue that technological change (EC 2007; IMF 2007a) is
the main driver of income distribution. Secondly, the Political Economy
of globalization approach has highlighted the eects of globalization on
Engelbert Stockhammer is at Kingston University.
C
2015 John Wiley& Sons Ltd/London School of Economics. Published by John Wiley & Sons Ltd,
9600 Garsington Road,Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
4British Journal of Industrial Relations
the bargaining power of labour and capital. It diers from the neoclassical
approach in highlighting the eects of globalization on bargaining power
(Rodrik 1997). Thirdly, similar in spirit, but with a dierentfocus, a literature
coming from the social sciences regards changes in income distribution as
the result of distributional struggle and emphasizes the role of welfare state
retrenchment and the decline of the unions (Bengtsson 2014; Hancke 2012;
Kristal 2010). Forth, there is a growing literature on financialization, which
also highlights its distributional impact, but few studies have examined the
influence of financialization on the functional income distribution so far
(D¨
unhaupt 2013; Stockhammer 2009). The empirical analysis has almost
exclusivelyfocused on advanced economies. Only the second stream has made
attempts to cover developing countries.
This study investigates the determinants of functional income distribution
and seeks to identify the contributions of technological change,globalization,
financialization and welfare state retrenchment. This is done with an
(unbalanced) panel analysis covering up to 71 countries (28 advanced and 43
developing and emerging economies) from 1970 to 2007. The contribution of
the paper is that it integrates insights from all four debates and uses a broad
sample of countries that include advanced as well as developing economies.
This has the advantage of more variation in the countries and it allows for
richer analysis of the eects of globalization, however it comes at the price of
limitations in data availability. We use the private, self-employment adjusted
wage share as the dependent variable and oer a rich set of robustness checks.
The paper is structured as follows. Section 2 will discuss changes in
functional income distribution and contextualizes these within broader
changes in income distribution. Section 3 presents the key determinants
of functional income distribution identified by dierent theories and oers
a review of the recent empirical literature that uses panel data analysis.
Section 4 discusses the estimation methodology and data sources. Section 5
presents the econometrics results and section 6 concludes.
2. Changes in income distribution
In the last quarter century dramatic changes in the personal distribution
as well as to the functional distribution of income have taken place. In the
advanced economies1the adjusted wage share has, on average, fallen from
73.4 per cent in 1980 to 64.0 per cent in 2007 (Figure 1). Changes in income
distribution havetaken somewhat dierent forms in dierent countries.In the
Anglo-Saxon countries a sharp polarization of personal income distribution
has occurred, combined with a moderate decline in the wage share. In the
United States the top 1 per cent of the income distribution increased their
share of national income by more than 10 percentage points (Atkinson et al.
2011; OECD 2008; Piketty and Saez 2003) and the wage share has declined
from 70.0 per cent to 64.9 per cent (2007). In continental European countries
functional rather than personal income distribution has shifted dramatically,
C
2015 John Wiley& Sons Ltd/London School of Economics.

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