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Productive knowledge, economic sophistication, and labor share

Imran Arif

World Development, 2021, vol. 139, issue C

Abstract: We present economic sophistication, the ability to produce complex products, as a potential determinant of labor share. Economic sophistication requires specific skills and tacit knowledge embedded in labor. It increases the bargaining power of workers, resulting in a higher labor share. We are the first to present economic sophistication as a potential determinant of labor share. We employ a fixed-effect model using panel data from 98 countries observed from 1970–2015 to find that economic sophistication has a positive and statistically significant effect on labor share. This positive effect applies to both OECD and non-OECD countries. A one standard deviation increase in economic sophistication increases labor share by about 3 percent, which corresponds to about 1.6 percentage points increase relative to the mean. Further, we show that economic sophistication and human capital have a substantial interaction effect that varies across OECD and non-OECD countries.

Keywords: Labor share; Economic sophistication; Distribution of income (search for similar items in EconPapers)
JEL-codes: D24 D33 E25 F10 F60 O15 O50 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.worlddev.2020.105303

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