Financialization and U.S. Income Inequality, 1970–2008

Abstract

Focusing on U.S. nonfinance industries, we examine the connection between financialization and rising income inequality. We argue that the increasing reliance on earnings realized through financial channels decoupled the generation of surplus from production, strengthening owners' and elite workers' negotiating power relative to other workers. The result was an incremental exclusion of the general workforce from revenue-generating and compensation-setting processes. Using timeseries cross-section data at the industry level, we find that increasing dependence on financial income, in the long run, is associated with reducing labor's share of income, increasing top executives' share of compensation, and increasing earnings dispersion among workers. Net of conventional explanations such as deunionization, globalization, technological change, and capital investment, the effects of financialization on all three dimensions of income inequality are substantial. Our counterfactual analysis suggests that financialization could account for more than half of the decline in labor's share of income, 9.6% of the growth in officers' share of compensation, and 10.2% of the growth in earnings dispersion between 1970 and 2008.

Determinant of income inequality in Indonesia

“…Similarly, contradicting the globalization thesis, developing and emerging countries have been experiencing worse decline in the labor share of income since the 1990s than in advanced countries (International Institute for Labor, 2011). Owing to these drawbacks some scholars have turned to financialization to explain increased inequality that resulted from the decline in labour's share of income (Chen & Chen, 2012;Dünhaupt, 2012Dünhaupt, , 2016Hein, 2015;Lin & Tomaskovic-Devey, 2013;Stockhammer, 2009Stockhammer, , 2017Van Arnum & Naples, 2013). One important manifestation of financialization is that profits are increasingly accumulated by means of finance that include dividends, capital gains, and interests, rather than trade, producing commodities, or nonfinancial services.…”

Evolution of the financial sector – three different stages: repression, development and financialisation

“…The literature has presented several explanations to describe this higher engagement of NFCs in financial activities, such as the existence of shorter planning horizons (Samuel, 2000;Crotty, 2005;and Aspara et al, 2014), the trend to be more concerned with current profitability than with long-term expansion (Crotty, 1990;Orhangazi, 2008a and2008b;Hein, 2012;and Hein and Dodig, 2015), the reduction of profits in the real sector and the increase in the external funding costs since the 1980s (Crotty, 2005;Orhangazi, 2008a and2008b;Baud and Durand, 2012;Lin and Tomaskovic-Devey, 2013;and Soener, 2015), the macroeconomic uncertainty and the institutional changes at the level of corporate governance (Baud and Durand, 2012;Akkemik and Özen, 2014;and Soener, 2015), and the mimetic behaviour and the institutional transmission of knowledge and practices from other financialised NFCs and from financial executives and consultants (Soener, 2015).…”

“…These studies use the traditional measure of Gini coefficient as dependent variable, concluding that the financialisation process had a significant negative impact on equality levels. Stockhammer (2009), Kristal (2010, Peralta and Escalonilla (2011), Dünhaupt (2013a), Lin and Tomaskovic-Devey (2013) and address empirically the relationship between the financialisation process and functional income distribution. The majority of these studies derive and estimate a labour income share, finding evidence supporting the claim that the financialisation process had a statistically significant and negative impact on the labour income share.…”

Functional income distribution in portugal: The role of financialisation and other related determinants

“…Although conventional economic theory states that labour share and profit share are constant in the long-term (Keynes 1939;Solow 1958;and Kaldor 1961), profit share has increased in the major advanced economies since the early 1980s, accompanied by the corresponding fall in the labour share (Stockhammer 2009 andKristal 2010;PeraltaEscalonilla 2011;Dünhaupt 2011;Estrada -Valdeolivas 2012;and Lin -Tomaskovic-Devey 2013). The fall in the labour share may lead to the rise in inequality of personal incomes (Karanassou -Sala 2013), exacerbate social strains (Dünhaupt 2011), and trigger a reduction in aggregate demand in the medium-and long-term (Naastepaad -Storm 2007;Hein -Vogel 2008;Stockhammer 2012;and Dünhaupt 2013a).…”

“…Most of these studies derive and estimate an equation for that share, finding statistical evidence that financialisation has caused a decline in the labour share and thus a rise in profit share (e.g. Stockhammer 2009;Kristal 2010;Peralta -Escalonilla 2011;Dünhaupt 2013a;Karanassou -Sala 2013;Lin -Tomaskovic-Devey 2013;and Alvarez 2015).…”