Has Globalization Eroded Labor’s Share? Some Cross-Country Evidence

In recent years, economists and other social scientists have devoted extensive research efforts to understanding the widening wage gap between high-skill and low-skill workers. This paper focuses on a slightly different question: how has globalization affected the relative share of income going to capital and labor? Using a panel of over one hundred countries, this paper analyses trends in labor shares and examines the relationship between shares and measures of globalization. Contrary to recent literature, the evidence suggests that labor shares are not constant over time. Over the 1960 to 2000 period, labor shares in poor countries fell, while shares in rich countries rose. These changes in labor shares are driven by changes in factor endowments and government spending, as well as by traditional measures of globalization, such as trade shares, exchange rate crises, movements in foreign investment, and capital controls. In particular, the results suggest that rising trade shares and exchange rate crises reduce labor’s share, while increasing capital intensity, capital controls and government spending increase labor’s share.