Financialisation and the slowdown of labour productivity in Portugal: A post-Keynesian approach

Abstract

The aim of this paper is to conduct a time series econometric analysis in order to empirically evaluate the role of financialisation in the slowdown of labour productivity in Portugal during the period from 1980 to 2017. During that time, the Portuguese economy faced a financialisation phenomenon due to the European integration process and the corresponding imposition of a strong wave of privatisation, liberalisation and deregulation of the Portuguese financial system. At the same time, Portuguese labour productivity exhibited a sustained downward trend, which seems to contradict the well-entrenched mainstream hypothesis on the finance–productivity nexus. Based on the post-Keynesian literature, we identify four channels through which the phenomenon of financialisation has impaired labour productivity, namely weak economic performance, the fall in labour’s share of income, the rise of inequality in personal income and an intensification of the degree of financialisation. The paper finds that lagged labour productivity, economic performance and labour income share positively impact labour productivity in Portugal, while personal income inequality and the degree of financialisation negatively impact labour productivity in Portugal. The paper also finds that the main triggers for the slowdown of labour productivity in Portugal are the degree of financialisation and personal income inequality over the last decades.

Why Has Labor Productivity Slowed Down in the Era of Financialization?: Insights from the Post-Keynesians for the European Union Countries

“…Effectively, the post-Keynesian literature tends to emphasize that the phenomenon of financialization has impaired labor productivity because of four different channels, namely, the weak economic performance, the decline in the labor income share, the increase in personal income inequality, and the strengthening of the degree of financialization and its corresponding harmful effects on innovation, research and development, technological progress, and productive investments performed by nonfinancial corporations (Tridico and Pariboni 2018; Correia and Barradas 2021). The first three channels are indirect channels through which the phenomenon of financialization has undermined labor productivity, and the fourth channel is a direct channel through which the phenomenon of financialization has weakened labor productivity.…”

“…Some of these four channels have already been tested in several econometric works (Sylos Labini 1983; Vergeer and Kleinknecht 2014; Guarini 2016; Micallef 2016; Tridico and Pariboni 2018; Carnevali et al 2020; Yousef 2020; and Correia and Barradas 2021), although these works do not directly assess all the aforementioned four channels through which the phenomenon of financialization has undermined labor productivity. Tridico and Priboni (2018) and Correia and Barradas (2021) are the only exceptions.…”

“…Some of these four channels have already been tested in several econometric works (Sylos Labini 1983; Vergeer and Kleinknecht 2014; Guarini 2016; Micallef 2016; Tridico and Pariboni 2018; Carnevali et al 2020; Yousef 2020; and Correia and Barradas 2021), although these works do not directly assess all the aforementioned four channels through which the phenomenon of financialization has undermined labor productivity. Tridico and Priboni (2018) and Correia and Barradas (2021) are the only exceptions. The former work focuses on the Organisation for Economic Cooperation and Development (OECD) countries but uses only one proxy to capture the degree of financialization (stock market capitalization) and does not consider in its estimates the potential indirect effects between the degree of financialization (the fourth channel) and economic performance (the first channel), the labor income share (the second channel), and personal income inequality (the third channel).…”

“…Third, this article uses four different proxies to measure the degree of financialization (credit, liquid liabilities, stock market capitalization, and stock market value traded), which allows us to take into account different scopes (e.g., size, depth, and efficiency) related to the role played by the financial system (Beck, Degryse, and Kneer 2014; Breitenlechner, Gächter, and Sindermann 2015) and different scopes related to the role played by banks and financial (stock) markets to sustain the phenomenon of financialization (Barradas 2020). A similar strategy was also followed by Correia and Barradas (2021), although their econometric work is also centered on Portuguese labor productivity. Fourthly and similarly to the econometric work performed by Correia and Barradas (2021), this article also estimates a model with interaction terms in order to properly evaluate the potential indirect effects between the degree of financialization (the fourth channel) and economic performance (the first channel), the labor income share (the second channel), and personal income inequality (the third channel).…”

“…A similar strategy was also followed by Correia and Barradas (2021), although their econometric work is also centered on Portuguese labor productivity. Fourthly and similarly to the econometric work performed by Correia and Barradas (2021), this article also estimates a model with interaction terms in order to properly evaluate the potential indirect effects between the degree of financialization (the fourth channel) and economic performance (the first channel), the labor income share (the second channel), and personal income inequality (the third channel). Fifthly and contrary to the majority of econometric works on this matter, this article presents not only the determinants of labor productivity in the EU countries but also the respective drivers, which allows us to better identify the influence of each channel linked to the phenomenon of financialization on the poor evolution of labor productivity in the EU countries.…”