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

Abstract

This paper makes an empirical analysis of the relationship between the labour income share and both financialisation and other related variables in Portugal from 1978 to 2012. We estimate an equation for the labour share that includes standard variables (technological progress, globalisation, education and business cycle) and variables to capture the effect of financialisation. We formulate the hypothesis that the financialisation process may lead to a rise in the inequality of functional income distribution through three channels: the change in the sectorial composition of the economy (due to both the increase in the weight of the financial activity and the decrease in government activity), the diffusion of shareholder value governance practices and the weakening of trade unions. Our results show that the financialisation process as an indirect long-term effect on the labour share through its impact on government activity and trade union density. The paper also finds evidence supporting the traditional explanations for functional income distribution, namely globalisation, education and business cycle. FUNCTIONAL INCOME DISTRIBUTION IN PORTUGAL: THE ROLE OF FINANCIALISATION AND OTHER RELATED DETERMINANTS ABSTRACTThis paper makes an empirical analysis of the relationship between the labour income share and both financialisation and other related variables in Portugal from 1978 to 2012. We estimate an equation for the labour share that includes standard variables (technological progress, globalisation, education and business cycle) and variables to capture the effect of financialisation. We formulate the hypothesis that the financialisation process may lead to a rise in the inequality of functional income distribution through three channels: the change in the sectorial composition of the economy (due to both the increase in the weight of the financial activity and the decrease in government activity), the diffusion of shareholder value governance practices and the weakening of trade unions. Our results show that the financialisation process as an indirect long-term effect on the labour share through its impact on government activity and trade union density. The paper also finds evidence supporting the traditional explanations for functional income distribution, namely globalisation, education and business cycle.

Drivers of private consumption in the era of financialisation: new evidence for the European Union countries

“…Figure 1 illustrates the two channels (and factors that contribute to explain each of them) associated with these contradictory effects of financialisation on private consumption. The first channel is linked with the fall (rise) of the labour income (profit) share in the era of financialisation (Stockhammer, 2009(Stockhammer, , 2012(Stockhammer, and 2017Kristal, 2010;Dünhaupt, 2011;Peralta and Escalonilla, 2011;Estrada and Valdeolivas, 2012;Lin and Tomaskovic-Devey, 2013;Barradas and Lagoa, 2017), which puts a downward pressure on private consumption through the reduction of households' labour income. This happens because wage incomes are normally related to higher consumption propensities than profit incomes (Stockhammer, 2012).…”

“…According to these latter authors, financialisation exerts a negative influence on the labour income share though three different channels: the change in the sectorial composition of economies (visible in the increasing importance of financial activity and the decreasing importance of general government activity), the emergence of 'shareholder value orientation' and the deterioration of general workers' bargaining power through the weakening of trade unions. Stockhammer (2009 and2017), Kristal (2010), Peralta andEscalonilla (2011), Dünhaupt (2013a), Lin and Tomaskovic-Devey (2013), Alvarez (2015), Köhler et al (2016), and Barradas and Lagoa (2017) are good examples of empirical econometric studies on the impact of financialisation on the labour income share. Most of them find it to be harmful.…”

Financialisation and the fall in the labour share: a panel data econometric analysis for the european union countries

“…'Shareholder value orientation' Increasing importance of finance Downsizing of government activity Deregulation of labour markets Liberalisation and globalisation Source: Barradas and Lagoa (2017) based on Hein (2012), Hein and Detzer (2014), Michell (2014), Hein and Dodig (2015), among others The first channel is related to a change in the sectorial composition of economies, namely through the increasing importance of the financial sector in relation to the non-financial sector and the decreasing weight of general government activity. 4 As emphasised by Stockhammer (2009), we recognise that there are other schools of thought explaining the fall in the labour share.…”

“…Most of these studies derive and estimate labour share equations, finding statistical evidence that financialisation has caused a decline in the labour share (e.g. Stockhammer, 2009 and2017;Kristal, 2010;Peralta and Escalonilla, 2011;Dünhaupt, 2013a;Lin and Tomaskovic-Devey, 2013;Alvarez, 2015;Köhler et al, 2016;and Barradas and Lagoa, 2017). This paper examines the impact of financialisation on the labour share in European Union (EU) countries between 1995 and 2013, making a threefold contribution to the literature.…”

“…Firstly, it assesses in a complete way the effects of financialisation on the labour share by analysing the three aforementioned channels, whereas most empirical studies on this matter typically focus on a single aspect of financialisation (Köhler et al, 2016). The study by Barradas and Lagoa (2017) is the only exception, but it is centred on Portugal between 1978 and 2012 through a time series econometric analysis. Secondly, a panel data econometric analysis is performed rather than a time series econometric analysis, which allows us to determine whether financialisation has been responsible for a fall in the labour share in a large set of countries.…”