The Impact of Financial Integration on the Labor Share of Income: An Empirical Evidence from a Panel Dataset
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The Impact of Financial Integration on the Labor Share of Income: An Empirical Evidence from a Panel Dataset Huong Le1,2
© Indian Society of Labour Economics 2020
Abstract This paper contributes to the literature on the impact of financial liberalization by including the earnings of self-employed while investigating the core determinants and mechanisms driving the income share going to labor during financial integration. The question of the precise impact of liberalization on the share of the selfemployed has received less attention in the literature. The author also uses both measures of capital account openness: de jure and de facto indicators. The empirical work is applied for a panel dataset of 30 countries during the period of 1970–2013. Despite using different measurement methods of financial openness, the results from all specifications support the hypothesis that financial integration leads to a decline in the labor share of income for the all countries sample. Keywords Labor share of income · Financial openness · Self-employed workers JEL Classification F2 · F4 · F6 · J3
1 Introduction Financial openness has been one of the most enduring concerns of international economists since the studies of McKinnon (1973) and Shaw (1973) on financial repression. Financial openness is seen to increase investment and promote economic growth and thereby reduce poverty level. They argued that developing country’s policies of financial repression, that restricted and controlled their financial markets, were the main reasons of the low economic growth rates during the 1950s and 1960s and suggested countries would benefit from adopting more open financial markets’ policies. In theory, financial integration improves economic growth, financial * Huong Le [email protected] 1
Department of Economics, Colorado State University, Fort Collins, CO, USA
2
School of International Business and Economics, Foreign Trade University, Hanoi City, Vietnam
13
Vol.:(0123456789) ISLE
The Indian Journal of Labour Economics
development and institutional quality and also helps reduce income inequality, poverty and unemployment rate. In addition, opening up to international financial markets improves market efficiency and thereby lead to a better allocation of investment (Fama 1970). Financial integration is also supposed to boost the productivity of capital stock by supporting borrowing for entrepreneurs, creating new investment opportunities and promoting growth (Orgiazzi 2007). However, in empirical studies, there has been a long, contentious debate among economists on the real direct and indirect benefits of financial integration (Gourinchas and Jeanne 2006). Since the 1970s, international economists have been developing theories and studies to measure the degree of financial integration as well as to elaborate the gains and costs of this phenomenon in different regions such as European countries, the USA, Asian countries. For example, Kose et al. (2003, 2007, 2009) provided evidence of a positive relation between financia
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