ILPC 2027

Conventional economic theory argues that factors’ shares (labour and profit shares) are constant in the long-term (Keynes, 1939; Solow, 1958; and Kaldor, 1961). However, profit share has increased in the major advanced economies since the early 1980s, with the corresponding fall in the labour share (Stockhammer, 2009 and 2012; Kristal, 2010; Peralta and Escalonilla, 2011; Dünhaupt, 2011; Estrada and Valdeolivas, 2012; and Lin and Tomaskovic-Devey, 2013). The fall in the labour share may lead to the rise in inequality of personal incomes (Karanassou and Sala, 2013), exacerbate the emergence of social strains (Dünhaupt, 2011), trigger a reduction in aggregate demand in the medium and long-term (Naastepaad and Storm, 2007; Hein and Vogel, 2008; Stockhammer, 2012; and Dünhaupt, 2013a), undermine the sustainability of social security systems (Cichon et al., 2004) and boost the households’ indebtedness (Hein, 2012).

The financial sector has acquired great importance in most developed economies and a growing preponderance over the economy, a phenomenon to which some refer as financialisation (e.g. Krippner, 2005; Epstein, 2005). Scholars of financialisation, framed in the post-Keynesian tradition, emphasise that financialisation decreases labour share through three channels: the change in the sectorial composition of the economy (the increasing importance of the financial sector in relation to non-financial sector and the decreasing weight of government activity), the emergence of the “shareholder value orientation” paradigm, and the weakening of the trade unions’ power.

A small body of literature has emerged in recent years to test the effect of financialisation on labour share. 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 and Escalonilla, 2011; Dünhaupt, 2013a; Karanassou and Sala, 2013; Lin and Tomaskovic-Devey, 2013; and Alvarez, 2015). However, these studies do not study directly the three aforementioned channels related with the process of financialisation.

This paper examines the impact of financialisation on the labour share in European Union countries between 1995 and 2013 inclusive, contributing to the literature in two new ways. Firstly, it focuses on European Union countries, whereas most studies are oriented to the specificities of large, highly developed and financialised countries like the USA or the UK. Secondly, a panel data econometric analysis is used. This allows us to understand whether the prejudicial effects of financialisation have been generalised and are transversal to a large set of countries or, alternatively, are specific to certain countries. The use of a panel data econometric analysis also permits a higher number of observations, sample variability and less collinearity, and thus improves the accuracy and reliability of estimates.

Accordingly, we estimate an equation where the labour share is a function of the standard variables (technological progress, globalisation, education and the business cycle) and from four additional variables linked to the process of financialisation (financial activity, government activity, shareholder orientation and trade union membership). It is concluded that financialisation exerts a negative influence on the labour share of European Union countries, mainly through the channels related with “shareholder value orientation” and de-unionisation.