Over the last three decades, the labour’s share of income, a measure showing the distribution of income between profits and wages, has been falling. This observation is at odds with Kaldor’s (1961) most influential stylized fact for macroeconomic modelling: the long run stability of the labour shares. Following Kaldor’s stylized fact, social scientists had largely neglected the topic until the early 1990s and economic research has only lately made a substantial comeback. The observed fall has attracted the attention of economists, policymakers and the media. This is because the fluctuations of the labour share have important effects on the business cycle, economic growth, inequality and macroeconomic policies.
The extent to which this matters to society was demonstrated by protests such as ‘Occupy Wall Street’, a movement against social and economic inequality worldwide. More recently, Thomas Piketty’s book, ‘Capital in the Twenty-First Century’, on the back of unprecedented sales, was described by the Economist, in 2014, as “the book that caught the world by storm”. As Piketty states on p.2: “the distribution of wealth is of interest to everyone”. These are real world examples suggesting that inequality-related research is a priority for our society. Moreover, The Societal Challenge of the Horizon 2020 programme has identified that one crucial challenge for the future of Europe is to reduce inequalities and social exclusions in the continent. In 2014, the G20 leaders recognized the need to “support development and inclusive growth, and help to reduce inequality and poverty”.
The fall in the labour share of most advanced economies since the 1980s has been associated with income inequality. Research by the Federal Reserve Bank of Saint Louis has demonstrated that the larger the decline in the labour share the more inequality increased in advanced economies. Therefore, examining the sources of the decline in the workers’ share of income is crucial to improve our understanding of macroeconomic dynamics and the policy implications drawn from macroeconomic models. The aim of this project is to enhancer understanding of what drives the labour share from a multi-country, multi-sector, and firm-level perspective, by accounting for differences in investment opportunities arising from financial obstacles. This project places finance, and in particular, the role of financial constraints at the heart of the labour share literature.
