Democracy, Labor’s Share of Income, and Labor Supply: A Time-Series Cross-Sectional Analysis

Abstract

This paper examines democracy’s impact on the labor share of income: the share of Gross Domestic Product (GDP) dedicated to wages, salaries, and benefits. I hypothesize democratic regimes afford labor the opportunity to increase its share of national income. While previous empirical work finds cross-sectional evidence for the hypothesis, this paper employs a time-series cross-sectional analysis using data for 119 countries between 1950 and 2017, indicating the labor share of income is higher in democratic countries. The estimates are robust to different specifications of the statistical model. This paper also examines a potential causal mechanism that links democracy to a higher labor share through the supply of labor (the average number of hours worked in the economy). The relationship between democracy and the supply of labor lends additional evidence to my hypothesis. In a world characterized by diverging democracy, the results imply the path countries choose between democracy and dictatorship matters.