Ariell Reshef*, Gianluca Santoni
This article was originally published in the March 2021 edition of the 5 papers…in 5 minutes.
The decline in labor shares in recent decades in many advanced economies has caught the attention and concerns of both academics and policy makers. The interest in declining labor shares stems from concerns about its implications for income inequality. Just like labor income, capital income accrues to people, but the ownership of capital is much more concentrated than human capital and labor income among workers: even small reductions in the share of value added that is paid to labor implies that income inequality among people rises significantly. This is particularly acute given relatively weak overall growth in recent times.
While previous work has associated the evolution of labor shares with technological and domestic policy changes, Ariell Reshef and Gianluca Santoni study in this article the role of globalization. In particular, they ask whether the proliferation of global value chains (GVCs) and China’s integration into the global economy has affected this evolution. While the decline in labor shares starts in the mid-1980s, the authors document that a marked acceleration in this decline occurred between 2001 – when China was admitted to the World Trade Organization – until 2007 – right before the onset of the global recession – after which labor shares cease to decline. A similar pattern is observed for the intensity of many countries’ GVC integration: starting in the mid-1990s, it accelerates in 2001-2007 and remains relatively constant henceforth. By developing a methodology to separate the effect of GVC integration from technological change and other factors, they find that countries that increased their “forward” GVC integration by exporting more intermediate inputs (as opposed to final goods’ exports) and by offshoring assembly saw their labor shares drop more than other countries. Other forms of global integration (exports and imports of final goods, and imports of intermediate inputs) are not associated with declines in labor shares.
The causal relationship between declines in labor shares and forward GVC integration is concentrated only in the 2001-2007 period, and is stronger when China is the destination of exports of inputs and where assembly is offshored to. Indeed, Reshef and Santoni find that production and exports of intermediate inputs are more labor-intensive than final good production and assembly, which helps explaining these results through a shift in the composition of production within the economy. The declines in labor shares are accounted for by loss of labor income in production jobs and, to a lesser extent, losses in managerial and marketing jobs – but, interestingly, are not associated with technical and research and development jobs. This last finding strengthens the conclusion that by integrating into the global economy and serving as a massive assembly platform, China has contributed to declines in labor shares in 2001-2007.
Original title of the article: Are Your Labor Shares Set in Beijing? The View through the Lens of Global Value Chains
Published in: CEPII Working Paper 2019-16
Credits (picture) : Shutterstock fuyu liu
* PSE member