Technological Changes, Offshoring, and the Labor Share

Abstract

Existing studies on the downward trend in the labor share of income mostly focus on changes within individual countries. I document, however, that half of the global decline in the labor share of income can be traced to the relocation of activities between countries. I develop a two-country model to show that when the relative price of investment goods falls, production activities with a small elasticity of substitution between capital and labor tend to get offshored from high- to low-wage countries. The model provides an explanation as to why such relocation may drive the labor share down in both developed and developing economies, as well as globally.

The Long‐Run Dynamics of the Labor Share in Japan

“…However, offshoring is not found to play any significant negative effect on the labor share, as found in other macro‐level studies (see, e.g. Jaumotte and Tytell, 2007; Bassanini and Manfredi, 2012; Lian, 2019).…”

Global Value Chain Participation and the Labour Share: Industry‐level Evidence from Emerging Economies

“…Furthermore, the negative effect of the capital-value added ratio is not robust across different specifications and seems to be relevant only from 2008 onwards. The insignificant coefficient in specification (5) further indicates that the elasticity of substitution has increased over time, consistent with the mechanism proposed by Lian (2019). Most importantly, we find a negative coefficient for Exports HW , despite controlling for the capital-value added ratio.…”

“…This will reduce the labour share if the elasticity of substitution is above 1 (β 1 < 0). Lian (2019) provides further evidence for the argument made by Elsby et al (2013), using a two-country model. He shows that it would be rational for global South countries to specialize in tasks with a low elasticity of substitution between capital and labour.…”

“…Firstly, productivity in emerging economies rises as advanced economies offshore capital‐intensive tasks to emerging economies. Similarly, emerging economies can benefit from trade‐induced technological change (De Loecker and Warzynski, 2012; Elsby et al., 2013; Lian, 2019). These processes, which we label the productivity channel , can increase the capital–value added ratio or labour productivity, and thus reduce the labour share for a given wage rate.…”

“…Thus, our theoretical framework introduces power relations between capital and labour into the economic literature on GVCs and the labour share in emerging economies, which has hitherto focused mainly on technological factors (Dao et al., 2019; Lian, 2019; Reshef and Santoni, 2019). Based on this theoretical framework we econometrically estimate the effect of GVCs on the labour share using industry‐level panel data.…”