Openness and Factor Shares: Is Globalization Always Bad for Labor?

Leblebicioglu, Asli and Weinberger, Ariel (2018): Openness and Factor Shares: Is Globalization Always Bad for Labor?

Abstract

The secular decline in the labor share since the 1980's is a global phenomenon, and a trend that is concurrent with large liberalization episodes worldwide. In this paper we investigate the liberalization episode in India during the 1990's, which has been characterized by large and unexpected changes in trade and foreign investment policies. Contrary to what might be expected given the reduction in the aggregate data, we uncover a trade channel that raises the labor-to-capital relative factor shares in India. A reduction in capital tariffs and liberalization of FDI raise the share of income paid to labor relative to capital. Our results reveal access to foreign capital as a new mechanism through which openness affects factor shares. An increasing share of foreign capital in the total capital stock provides a capital-augmenting technical change and potentially reduces rental rates, both of which raises the relative labor share. We find capital and R&D intensities, and the borrowing capacity of the firm, to be important determinants of the factor share response to openness. Finally, we identify domestic deregulation policies and credit expansion as potential determinants of the observed decline in the labor share.

• Item Type: MPRA Paper
• Language: English
• Keywords: Labor share, trade liberalization, foreign capital, openness
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E25 - Aggregate Factor Income Distribution; F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions; F - International Economics > F6 - Economic Impacts of Globalization > F60 - General; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy

References

Acemoglu, Daron and Pascual Restrepo, \Modeling Automation," Technical Report, National Bureau of Economic Research 2018.

Aghion, Philippe, Robin Burgess, Stephen J Redding, and Fabrizio Zilibotti, \The unequal e�ects of liberalization: Evidence from dismantling the License Raj in In- dia," The American Economic Review, 2008, 98 (4), 1397{1412.

Ahsan, Reshad N. and Devashish Mitra, \Trade liberalization and labor's slice of the pie: Evidence from Indian �rms," Journal of Development Economics, 2014, 108, 1 { 16.

Alfaro, Laura and Maggie X Chen, \Selection and Market Reallocation: Productivity Gains from Multinational Production," 2015.

Areendam Chanda, Sebnem Kalemli-Ozcan, and Selin Sayek, \How does foreign direct investment promote economic growth? Exploring the e�ects of �nancial markets on linkages," Journal of Development Economics, 2010, 91 (2), 242{256.

Amiti, Mary and Jozef Konings, \Trade Liberalization, Intermediate Inputs, and Pro- ductivity: Evidence from Indonesia," American Economic Review, 2007, 97 (5), 1611{ 1638.

Attanasio, Orazio, Pinelopi K. Goldberg, and Nina Pavcnik, \Trade reforms and wage inequality in Colombia," Journal of Development Economics, 2004, 74 (2), 331 { 366.

Autor, David, David Dorn, and Gordon H Hanson, \The China syndrome: Local labor market e�ects of import competition in the United States," American Economic Review, 2013, 103 (6), 2121{68.

Bas, Maria and Antoine Berthou, \Does input-trade liberalization a�ect �rms' foreign technology choice?," The World Bank Economic Review, 2017, 31 (2), 351{384.

Blalock, Garrick and Paul J Gertler, \Welfare gains from foreign direct investment through technology transfer to local suppliers," Journal of International Economics, 2008, 74 (2), 402{421.

Burstein, Ariel, Javier Cravino, and Jonathan Vogel, \Importing Skill-Biased Tech- nology," American Economic Journal: Macroeconomics, 2013, 5 (2), 32{71. 37

Caselli, F. and D.J. Wilson, \Importing technology," Journal of Monetary Economics, 2004, 51 (1), 1{32.

DeLoecker, Jan and Frederic Warzynski, \Markups and Firm-Level Export Status," American Economic Review, 2012, 102 (6), 2437{2471.

Dix-Carneiro, Rafael and Brian K Kovak, \Trade reform and regional dynamics," American Economic Review, 2017.

Eaton, J. and S. Kortum, \Trade in Capital Goods," European Economic Review, 2001, 45, 1195{1235.

Eden, Maya and Paul Gaggl, \On the Welfare Implications of Automation," Review of Economic Dynamics, 2018, forthcoming.

Elsby, Michael, Bart Hobijn, and Aysegul Sahin, \The Decline of the U.S. Labor Share," Brookings Papers on Economic Activity, 2013, Fall, 1{63.

Furceri, Davide and Prakash Loungani, \The Distributional E�ects of Capital Account Liberalization," Journal of Development Economics, 2017, forthcoming.

Goldberg, Pinelopi, Amit Khandelwal, Nina Pavcnik, and Petia Topalova, \Trade liberalization and new imported inputs," The American Economic Review, 2009, 99 (2), 494{500.

Goldberg, Pinelopi Koujianou and Nina Pavcnik, \Distributional E�ects of Global- ization in Developing Countries," Journal of Economic Literature, 2007, 45 (1), 39{82.

Gopinath, Gita and Brent Neiman, \Trade Adjustment and Productivity in Large Crises," American Economic Review, March 2014, 104 (3), 793{831.

Gorodnichenko, Yuriy, Jan Svejnar, and Katherine Terrell, \When does FDI have positive spillovers? Evidence from 17 transition market economies," Journal of Compara- tive Economics, 2014, 42 (4), 954{969.

Goyal, SK, \Political economy of India's economic reforms," Institute for Studies in Indus- trial Development (ISID) Working Paper, 1996.

Gupta, Prachi and Matthias Helble, \Adjustment to Trade Opening: The Case of Labor Share in India's Manufacturing Industry," 2018.

Harrison, Ann, \Has Globalization Eroded Labor's Share? Some Cross-Country Evi- dence," Technical Report 39649, MPRA Working Paper 2005. 38

Hummels, David, Rasmus J�rgensen, Jakob Munch, and Chong Xiang, \The wage e�ects of o�shoring: Evidence from Danish matched worker-�rm data," American Economic Review, 2014, 104 (6), 1597{1629.

Javorcik, B., \Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages," American Economic Review, 2004, 94 (3), 605{627.

and Mariana Spatareanu, \Liquidity Constraints and Firms' Linkages with Multina- tionals," World Bank Economic Review, 2009, 23 (2), 323{346.

Kamal, Fariha, Mary Lovely, and Devashish Mitra, \Trade liberalization and labor shares in China," 2015.

Kandilov, Ivan T, Asl� Leblebicioglu, and Ruchita Manghnani, \Trade Liberaliza- tion and Investment in Foreign Capital Goods: A Look at the Intensive Margin," Working Paper 2017.

Karabarbounis, Loukas and Brent Neiman, \The Global Decline of the Labor Share," The Quarterly journal of economics, 2014, 129 (1), 61{103.

Keller, Wolfgang and Stephen R Yeaple, \Multinational enterprises, international trade, and productivity growth: �rm-level evidence from the United States," The Review of Economics and Statistics, 2009, 91 (4), 821{831.

Krishna, Pravin and Devashish Mitra, \Trade liberalization, market discipline and productivity growth: new evidence from India," Journal of development Economics, 1998, 56 (2), 447{462.

Leblebicioglu, Asli and ArielWeinberger, \Credit and the Labor Share: Evidence from US States," Technical Report, Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper 326, 2017.

Loecker, Jan De, Pinelopi K. Goldberg, Amit K. Khandelwal, and Nina Pavcnik, \Prices, Markups, and Trade Reform," Econometrica, 2016, 84 (2), 445{510.

McGrattan, Ellen R and Edward C Prescott, \Openness, technology capital, and development," Journal of Economic Theory, 2009, 144 (6), 2454{2476.

Melitz, Marc, \The Impact of Trade on Intra-Industry Reallocations and Aggregate In- dustry Productivity," Econometrica, 2003, 71 (6), 1695{1725. 39

Ober�eld, Ezra and Devesh Raval, \Micro Data and Micro Technology," Working Paper 2014.

Pierce, Justin R and Peter K Schott, \The surprisingly swift decline of US manufac- turing employment," American Economic Review, 2016, 106 (7), 1632{62.

Raval, Devesh, \The micro elasticity of substitution and non-neutral technology," RAND Journal of Economics, 2018, forthcoming.

Raveh, Ohad and Ariell Reshef, \Capital imports composition, complementarities, and the skill premium in developing countries," Journal of Development Economics, 2016, 118, 183 { 206.

Schott, Peter K, \The relative sophistication of Chinese exports," Economic policy, 2008, 23 (53), 6{49.

Sivadasan, Jagadeesh, \Regulatory Regime in India: 1947 to 1998," Technical Report, working paper, University of Michigan 2006.

Topalova, Petia and Amit Khandelwal, \Trade Liberalization and Firm Productivity: The Case of India," Review of Economics and Statistics, 2011, 93 (3), 995{1009.

Topaloval, Petia, \Factor Immobility and Regional Impacts of Trade Liberalization: Evi- dence of Poverty from India," American Economic Journal: Applied, 2010, 2, 1{41.