International Diversification, Reallocation, and the Labor Share

Joel David, Romain Ranciere and David Zeke
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David Zeke: https://www.federalreserve.gov/econres/david-l-zeke.htm

No WP 2023-16, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: How does growing international financial diversification affect firm-level and aggregate labor shares? We study this question using a novel framework of firm labor choice in the face of aggregate risk. The theory implies a cross-section of labor risk premia and labor shares that appear as markups in firm-level data. International risk sharing leads to a reallocation of labor towards riskier/low labor share firms alongside a rise in within-firm labor shares, matching key micro-level facts. We use cross-country firm-level data to document a number of empirical patterns consistent with the theory, namely: (i) riskier firms have lower labor shares and (ii) international financial diversification is associated with a reallocation towards risky/low labor share firms. Our estimates suggest the reallocation effect has dominated the within effect in recent decades; on net, increased financial integration has reduced the corporate labor share in the U.S. by about 2.5 percentage points, roughly one-third of the total decline since the 1970s.

Keywords: international diversification; international risk sharing; reallocation; labor share (search for similar items in EconPapers)
JEL-codes: E24 E25 E44 F21 F4 F62 F66 G15 (search for similar items in EconPapers)
Pages: 68
Date: 2023-04-20
New Economics Papers: this item is included in nep-bec, nep-fdg and nep-opm
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https://doi.org/10.21033/wp-2023-16

Related works:
Working Paper: International Diversification, Reallocation, and the Labor Share (2023)
Working Paper: International Diversification, Reallocation, and the Labor Share (2023)
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