Openness and factor shares: Is globalization always bad for labor?

Asli Leblebicioglu () and Ariel Weinberger ()

Journal of International Economics, 2021, vol. 128, issue C

Abstract: This paper studies the response of factor shares to the liberalization episode in India during the 1990's, which is characterized by large and unexpected changes in trade and foreign investment policies. We find that access to foreign capital caused an increase in the labor-to-capital relative factor share. As lower tariffs on capital goods and FDI liberalization reduce the cost of foreign capital, firms increase their use of foreign capital relative to domestic capital. This shift in the composition of the capital stock improves capital's productivity per unit of expenditure, which in turn raises wages and the relative labor share. Consistent with this mechanism, firm TFP and the share of firms that import capital both increase in industries with the largest capital cost reductions, while the relatively larger rise of labor payments is observed predominantly for new capital importers. We identify domestic deregulation policies and reallocation to capital-intensive firms as potential determinants of the observed decline in the aggregate labor share. Finally, in a model where domestic and foreign capital are imperfect substitutes, we quantify the effect of a reduction in capital tariffs, and find that it explains a large part of the estimated increase in the labor share found in the reduced form analysis.

Keywords: Labor share; Trade liberalization; Foreign capital; Openness (search for similar items in EconPapers)
JEL-codes: E25 F13 F60 O24 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Working Paper: Openness and Factor Shares: Is Globalization Always Bad for Labor? (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:128:y:2021:i:c:s0022199620301215

DOI: 10.1016/j.jinteco.2020.103406

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