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Petri Böckerman (Labour Institute for Economic Research)

Globalization, Creative Destruction, and Labor Share Change: Evidence on the Determinants and Mechanisms from Longitudinal Plant-level Data. Petri Böckerman (Labour Institute for Economic Research) Mika Maliranta (The Research Institute of the Finnish Economy).

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Petri Böckerman (Labour Institute for Economic Research)

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  1. Globalization, Creative Destruction, and Labor Share Change: Evidence on the Determinants and Mechanisms from Longitudinal Plant-level Data Petri Böckerman (Labour Institute for Economic Research) Mika Maliranta (The Research Institute of the Finnish Economy) Työsuojelurahasto on rahoittanut tätä tutkimusta.

  2. 1. Introduction • The labor share of value added has declined in several industrialized countries. • Globalization has potential influences on the labor share through several channels: -a. Increase of competition, b. Increase of required return to capital, c. Bargaining power of labor decreases, d. Specialization into the production of capital-intensive goods, e. Adoptation of labor-saving technologies.

  3. 1. Introduction • The literature has taken advantage of cross-country data sets (emphasis on the institutional features). • The Curse of Dimensionality is evident in cross-country studies. • Some evidence that the exposure to international trade is associated with a decline in the labor share. • This paper argues that it is useful to analyze the effects of globalization by using panel data of regions and industries from one country. This is the second-best choice, because the best one would be to use plant-level data from several countries. • We show that there are large differences in the micro-level dynamics of the labor share across regions within the same country that share exactly the same institutions and regulations.

  4. 1. Introduction • There are large differences in the evolution of the labor share across the Finnish regions (and industries) (see Fig. 1). • We focus on the effects of intra-industry restructuring. • Is there a systematic structural change in terms of value added towards those plants that have a lower labor share because of the increasing globalization?

  5. Figure 1. The labor share by region.

  6. 2. Decomposition • The aggregate labor share declines when aggregate labor productivity growth exceeds aggregate wage growth (measured in nominal terms). • Change in industry labor share == within plants + micro-level restructuring • Micro-level restructuring == between component + entry + exit + convergence term • The within component is defined as the weighted average of the changes in the labor shares of the continuing plants. • The between component is negative when there is a systematic structural change among continuing plants in terms of value added towards those plants that have a lower labor share. • We also analyze the evolution of labor productivity growth and wage growth by using similar decomposition.

  7. 2. Decomposition dW = wh(W) + str(W) -dP = -wh(P) - str(P) dF = wh(F) + str(F) str(X)=ent(X)+exit(X)+bw(X)+cv(X) X = {W, P, F}

  8. 3. Data • Plant-level data of Finnish manufacturing industries 1975-2005. • We construct a panel of micro-level components of the labor share change (12 industries, 4 regions and 30 years). • Globalization is measured by two variables, which capture the exposure to international trade and foreign ownership.

  9. 4. Results • There are large differences in the evolution of the micro-level components of the labor share across regions. • The measures of globalization have evolved differently across regions. For example, the exposure to international trade has increased most rapidly in Northern Finland.

  10. 4. Results • We estimate OLS regressions over the period 1977-2005 (1316 observations). • We explain the changes in the labor share, labour productivity and wages and their micro-level components. • Explanatory variables are the measures of globalization (lagged by one year) and the indicators for years and industries.

  11. 4. Results • We find that increasing exports lowers the labor share. The greatest part of this effect can be attributed to the micro-structural component. • Hence, there is evidence of a systematic structural change in terms of value added towards those plants that have a lower labor share because of the increasing exposure to international trade. • However,increasing exports are not associated with the growth rate of wages. • Instead, the evidence shows that exports increase aggregate labor productivity growth through restructuring.

  12. 4. Results • The export share has increased more than 20 percentage points over the last three decades. • According to our estimates this would lead to a decline in the labor share by 10 percent (or 5-6 percentage points), of which 40 percent takes place through intra-industry restructuring.

  13. 5. Summary • Globalization squeezes the labor share because of increasing labor productivity. • This effect is caused by restructuring towards plants with a lower labor share. • Wage growth remains (largely) unaffected.

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