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Can the HOS model explain changes in labor shares? A tale of trade and wage rigidities

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  • Bruno Decreuse

    ()
    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)

  • Paul Maarek

    ()
    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)

Abstract

This paper questions the ability of the standard HOS model to explain changes in the labor shares (LS) of income in OECD countries. We use the Davis (1998) model where there is a wage rigidity in a sub-group of countries. We show that trade openness with developing countries reduces LS in rigid-wage countries, and does not affect LS in free-wage countries. This pattern is induced by factor reallocation towards capital-intensive sectors in rigid-wage countries. Using the KLEMS dataset for 8 OECD countries over the period 1970-2005, we show that the weight of capital-intensive sectors substantially increased in Continental European countries, while it did not change or even decreased in the US and the UK. Fixed effects regressions suggest that trade intensity with China explains between 30% (IV estimates) and 60% (OLS estimates) of the observed differential labor share change between Continental Europe and Anglo-Saxon countries.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00551345.

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Date of creation: 03 Jan 2011
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Handle: RePEc:hal:wpaper:halshs-00551345

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Related research

Keywords: Davis model; factor reallocation; elasticity of substitution; unemployment;

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  1. Maliranta, Mika & Böckerman, Petri, 2009. "Globalization, Creative Destruction, and Labor Share Change: Evidence on the Determinants and Mechanism from Longitudinal Plant-level Data," Discussion Papers, The Research Institute of the Finnish Economy 1178, The Research Institute of the Finnish Economy.
  2. Alain de Serres & Stefano Scarpetta & Christine de la Maisonneuve, 2002. "Sectoral Shifts in Europe and the United States: How They Affect Aggregate Labour Shares and the Properties of Wage Equations," OECD Economics Department Working Papers 326, OECD Publishing.
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