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On Finance's Heterogeneous Labor Share Dynamics: A Neoclassical Perspective

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  • Adnan Velic

    (Technological University Dublin)

Abstract

Across the developed world, we find that labor's share of income at the sectoral level has experienced a much lower decline in finance than in the remainder of the market economy. We examine how well these heterogeneous sectoral dynamics can be explained by the neoclassical growth model. The framework is able to predict the direction and magnitude of labor share changes in both finance and non-finance through a combination of capital-labor complementarity and net labor-augmenting technical change. The underlying supply-side decomposition reveals that the lower labor share decline in finance is a reflection of its weaker net labor-augmenting productivity growth. The latter counters the stronger capital-labor synergies and capital intensity in the sector, which act to inflate the absolute size of labor share changes. Labor- and capital-biased productivity growth both tend to be higher in finance consistent with higher profitability in the industry.

Suggested Citation

  • Adnan Velic, 2023. "On Finance's Heterogeneous Labor Share Dynamics: A Neoclassical Perspective," Trinity Economics Papers tep1523, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduee:tep1523
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    File URL: https://www.tcd.ie/Economics/TEP/2023/TEP1523.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    finance; laborshare; capital-laborsubstitution; technicalchange;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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