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Financial Globalization and the Labor Share in Developing Countries: The Type of Capital Matters

Author

Listed:
  • Katharina van Treeck

    (Georg-August University Göttingen)

  • K.M. Wacker

    (University of Mainz)

Abstract

In this paper, we investigate how de facto financial globalization has influenced the labor share in developing countries. Our main argument is the need to distinguish between different types of capital in this context, as different forms of foreign investment have different fixed costs and impacts on the host countries' production process and vary concerning their bargaining power vis-à-vis labor. Assuming an aggregate elasticity of substitution between capital and labor would thus be misleading. Our econometric analysis of the impact of foreign direct vs. portfolio investment in a sample of about 40 developing and transition countries after 1992 supports this claim. Using different panel data techniques to address potential endogeneity problems, we find that FDI has a positive effect on the labor share in developing countries, while the impact of portfolio investment is significantly smaller, and potentially negative. Our results also highlight that de facto foreign investment cannot explain the decline of the labor share in developing countries over the investigated period.

Suggested Citation

  • Katharina van Treeck & K.M. Wacker, 2017. "Financial Globalization and the Labor Share in Developing Countries: The Type of Capital Matters," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 219, Courant Research Centre PEG.
  • Handle: RePEc:got:gotcrc:219
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    References listed on IDEAS

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    Cited by:

    1. Kim, David & Kim, Woo-Yung, 2018. "What Determines Regional Labor Shares? Evidence from Korea," Working Papers 2018-06, University of Sydney, School of Economics.

    More about this item

    Keywords

    Labor Share; Globalization; Income Distribution; International Capital Flows; FDI; Wage Bargaining;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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