The drivers of labour share and impact on pay inequality: A firm-level investigation

Roya Taherifar (), Mark Holmes () and Gazi Hassan ()
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Roya Taherifar: University of Waikato

Working Papers in Economics from University of Waikato

Abstract: Income inequality and labour share have followed divergent trends in Australia. Empirical studies have attempted to explain their movement and their relationship using macro data. However, what is lacking is a firm-level study to capture the determinants of labour share specific to the firm’s production technology and market structures with an investigation into the impact on pay inequality inside firms. Hence, we conduct the first Australian firm-level study using a sample of Australian listed firms over the period 2004-2019. First, we examine the impact of technological progress, product market power and labour market power on the labour share. The results show that the decline in Australian labour share is mainly driven by technological progress and increasing product market power. However, labour market power does not have a significant impact on labour share. These findings are robust to an array of sensitivity tests. Second, we examine the impact of labour share on pay inequality within firms. We find robust evidence that declining labour share is a significant driving force in the evolution of pay inequality. Moreover, a 10 per cent decline in labour share rises pay inequality by 4.19 per cent. Additional tests show that technological progress and product market power can moderate the negative impact of labour share on pay inequality.

Keywords: Income Distribution; Mark-up; Labour Share; Pay Inequality; Total Factor Productivity (search for similar items in EconPapers)
JEL-codes: D33 D42 J31 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2023-04-17
New Economics Papers: this item is included in nep-bec, nep-com, nep-eff and nep-lma
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