International Diversification, Reallocation, and the Labor Share

Joel David, Romain Ranciere and David Zeke

No 31168, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F2 F21 F23 F4 F66 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-int and nep-opm
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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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