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Capital Markets Integration and Labor Market Institutions

A major development in recent decades in industrialised countries is the decline in national savings rates. Over the same period, the labour’s share of national income has also declined in many industrialised countries. This paper seeks to provide a unified account of these developments. We show that globalization, in the form of increased capital mobility, provides incentives to implement labour market reforms that raise the returns to capital and improve efficiency. Nevertheless, in a world where aggregate savings reflect life-cycle motives and are mainly performed out of labour income, the associated fall in the labour share reduces aggregate savings and the pace of capital accumulation. This inefficient outcome is due to competition for capital between countries generating negative externalities.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 144.

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Date of creation: 01 Oct 2005
Date of revision: 01 Nov 2007
Handle: RePEc:sef:csefwp:144
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