Labor Share Fluctuations in Emerging Markets: The Role of the Cost of Borrowing

Serdar Kabaca

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: This paper contributes to the literature by documenting labor income share fluctuations in emerging economies and proposing an explanation for them. We show that emerging markets differ from developed markets in terms of changes in the labor share over the business cycle. Labor share is more volatile in emerging markets and is pro-cyclical with output, especially in countries facing counter-cyclical interest rates. On the contrary, labor share in developed markets is more stable and slightly counter-cyclical with output. A frictionless RBC model cannot account for these facts. We introduce working capital into an RBC model, which generates liquidity need for labor payments. The main result is that the behavior of the cost of borrowing along with working capital mechanisms can predict the right sign of the comovement between labor share and output, and can partly be responsible for the volatility of labor share. We also show that imperfect financial markets in the form of credit restrictions not only amplify the results for the variability of labor share but also help better explain some of the striking business cycle regularities in emerging markets such as strongly pro-cyclical investment and counter-cyclical net exports.

Keywords: labor income share; emerging markets; working capital; credit constraints (search for similar items in EconPapers)
JEL-codes: E25 E44 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2011-09
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Labour Share Fluctuations in Emerging Markets: The Role of the Cost of Borrowing (2014)
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