On Finance's Heterogeneous Labor Share Dynamics: A Neoclassical Perspective

Adnan Velic

Economic Papers from Trinity College Dublin, Economics Department

Abstract: Across the developed world, we find that labor's share of income at the sectoral level has experienced a much lower decline in finance than in the remainder of the market economy. We examine how well these heterogeneous sectoral dynamics can be explained by the neoclassical growth model. The framework is able to predict the direction and magnitude of labor share changes in both finance and non-finance through a combination of capital-labor complementarity and net labor-augmenting technical change. The underlying supply-side decomposition reveals that the lower labor share decline in finance is a reflection of its weaker net labor-augmenting productivity growth. The latter counters the stronger capital-labor synergies and capital intensity in the sector, which act to inflate the absolute size of labor share changes. Labor- and capital-biased productivity growth both tend to be higher in finance consistent with higher profitability in the industry.

Keywords: finance; laborshare; capital-laborsubstitution; technicalchange (search for similar items in EconPapers)
JEL-codes: G2 O3 O4 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2023-11
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Persistent link: https://EconPapers.repec.org/RePEc:tcd:tcduee:tep1523

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