capital strongaccountstrong openness and the labour share of income.pdfVIP

Cambridge Journal of Economics Advance Access published January 20, 2007 Cambridge Journal of Economics 2007, 1 of 21 doi:10.1093/cje/bel037 Capital account openness and the labour share of income Arjun Jayadev* This paper investigates the relationship between capital account openness and the share of labour in national income. Employing a new index of financial openness and a cross-country panel of labour shares available from the United Nations System of National Accounts, the author shows a robust negative correlation between the degree of openness and the labour share. Although this effect is not present for low income countries, the direct negative relationship holds for all other subsamples and in the presence of a variety of controls. A plausible explanation is that openness alters the conditions of bargaining between labour and capital. By increasing the bargaining strength of capital vis-a-vis labour, increased capital mobility raises rents accruing to capital. Thus, capital account openness may reduce labour’s share of income in the firm, and thereby, at an economy-wide level, its share of national output. Key words : Capital Mobility, Factor Shares, Bargaining, Openness, Labour Share JEL Classification : E1,E25,F3,J53 1. Introduction The world has changed. More intense competition, both within and between countries has decreased rents. Financial capital moves around, physical capital relocates. The old view just no longer applies, and the limits of redistribution through the market are much tighter. Trying to appropriate the rents may lead firms to move to emerging markets, or else just go bankrupt. Olivier ´ Blanchard, Liberation, December 2002. A significant issue withi