International Diversification, Reallocation, and the Labor Share

Joe David, Romain Ranciere and David Zeke

No 18128, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 US by about 2.5 percentage points, roughly one-third of the total decline since the 1970s.

Keywords: Labor share; International diversification (search for similar items in EconPapers)
JEL-codes: F2 F23 F36 F66 (search for similar items in EconPapers)
Date: 2023-04
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Working Paper: International Diversification, Reallocation, and the Labor Share (2023)
Working Paper: International Diversification, Reallocation, and the Labor Share (2023)
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