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Democracy and the Labor Share of Income: A Cross-Country Analysis

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Labor Income Share in Asia

Part of the book series: ADB Institute Series on Development Economics ((ADBISDE))

Abstract

Summary statistics on the labor share of income show that between-country variation is much greater than within-country variation: functional income distribution is determined by factors which change substantially across countries but are persistent over time. This article attempts to shed some light on the long-run and political economy determinants of the labor income share. We revisit and extend previous empirical research on democratic political institutions and the labor share using a dataset of 112 countries over the period 1970–2015. Our empirical analysis shows that democracy allows workers to appropriate a higher share of national income. The evidence is robust to different indices of democracy and different periods of time, and after performing instrumental variable estimation. These results are particularly relevant today, in light of the recent global decline in the labor income share and current crisis of democracy.

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Notes

  1. 1.

    The OECD sample is composed of today’s OECD member countries.

  2. 2.

    For example, the Polity IV score for Switzerland is equal to its maximum since 1848.

  3. 3.

    For example, Switzerland’s score ranges from a value of 23.04 to a value of 43.4 in the period 1970–2015.

  4. 4.

    Some of the variables presented in this table are discussed in Sect. 5.

  5. 5.

    Bolivia, Chile, Ecuador, Georgia, the Kyrgyz Republic, Mexico, Peru, Senegal, the Republic of Korea, Sri Lanka, and Thailand.

  6. 6.

    Similar relationships are found with year-by-year scatter plots.

  7. 7.

    No data is available for the dichotomous variable for the period 2010–2014.

  8. 8.

    Only the results for oil exporters and the natural logarithm of GDP per capita are presented in the table.

  9. 9.

    Rodrik’s (1999) article mainly focuses on wages and not the share of labour. However, among the various estimations, the author includes a panel data regression of the impact of democracy on the labour share. His estimated coefficients range from 11 to 41.

  10. 10.

    Results not presented here.

  11. 11.

    Results not presented here.

  12. 12.

    According to the authors, less than 25% of value added.

  13. 13.

    Where both the dichotomous variable switches from 0 to 1 and the Polity IV index exhibits a discontinuous change.

  14. 14.

    In addition to the above suggestions, Young and Lawson (2014) instrument democracy with a measure of a country’s checks and balances (Keefer and Stasavage 2002; Keefer and Stasavage 2003). With respect to this measure, we argue that it is not exogenous, as it is itself a manifestation of the presence of democracy. For example, the extent of institutionalised constraints on the exercise of executive power is one of the components of the Polity IV index. As such, it may be correlated with the error term.

  15. 15.

    Przeworski et al. (2000) use probit with the dichotomous variable of Democracy/Dictatorship. Epstein et al. (2006) and Benhabib et al (2013) use tobit with the Polity IV and the Freedom House indices. Also, Barro (1999) argues that the use of non-linear estimation would improve his approach.

  16. 16.

    Relevant post-estimation tests have been performed, but not presented here.

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Authors and Affiliations

  1. Global Sustainable Development, University of Warwick, Coventry, UK

    Marta Guerriero

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  1. Marta Guerriero
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Correspondence to Marta Guerriero .

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Editors and Affiliations

  1. Cornell University, Ithaca, NY, USA

    Gary Fields

  2. Asian Development Bank Institute, Chiyoda-ku, Tokyo, Japan

    Saumik Paul

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Guerriero, M. (2019). Democracy and the Labor Share of Income: A Cross-Country Analysis. In: Fields, G., Paul, S. (eds) Labor Income Share in Asia. ADB Institute Series on Development Economics. Springer, Singapore. https://doi.org/10.1007/978-981-13-7803-4_6

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