1. FINANCIALIZATION AND
MEASURING THE LABOR SHARE
New School – U Mass Amherst Graduate Student Workshop
11/03/2012

2. Research Questions
2
 What are the implications of financialization for
the labor share?
 Conceptualizing the Financialization – Labor
Share Nexus
 What are the measurement issues of the labor
share associated with this task?
 Outlining the main areas of concern
Financialization and Measuring the Labor Share 11/3/2012

3. Outline
3
 Explaining the Labor Share
 Sectoral Composition
 Technology and Skills
 Labor and Product Market Characteristics
 Financialization (?)
 Measuring the Labor Share
 Sectoral Measuring Issues and Multinationals
 Labor Income in National Accounts
Financialization and Measuring the Labor Share 11/3/2012

4. Relevance of the Labor Share
4
 Traditional measure of distribution
 Bridging national and household level analysis
 Aggregate demand and growth implications
 LS – Productivity nexus important for inflation
 Associations with employment/unemployment
 Relevant for personal income distribution
 Useful to verify assumptions about production
Financialization and Measuring the Labor Share 11/3/2012

5. Outline
5
 Explaining the Labor Share
 Sectoral Composition
 Technology and Skills
 Labor and Product Market Characteristics
 Financialization (?)
 Measuring the Labor Share
 Sectoral Measuring Issues and Multinationals
 Labor Income in National Accounts
Financialization and Measuring the Labor Share 11/3/2012

6. Explaining the Labor Share
6
 Sectoral Composition
 To what extent does it determine the labor share?
 Variation of labor shares between and within
industries
 Conceptually straight forward, empirically not
so much
 De Serres et al. (2002) and Glyn (2009)
 Gollin (2002), Young (2010) and OECD (2012)
 Level of aggregation and measurement key
Financialization and Measuring the Labor Share 11/3/2012

7. Outline
7
 Explaining the Labor Share
 Sectoral Composition
 Technology and Skills
 Labor and Product Market Characteristics
 Financialization (?)
 Measuring the Labor Share
 Sectoral Measuring Issues and Multinationals
 Labor Income in National Accounts
Financialization and Measuring the Labor Share 11/3/2012

8. Explaining the Labor Share II
8
 Technology and Skills
 Labor or capital-augmenting technology
 Skilled vs. unskilled Workers
 Long- vs. medium-run, Acemoglu (2003)
 Shift in the 1980’s
 Determining the substitution between
 Capital and labor
 Skilled and unskilled labor
 Evidence in the neoclassical literature
 Measurement of technology and skills?
Financialization and Measuring the Labor Share 11/3/2012

9. Outline
9
 Explaining the Labor Share
 Sectoral Composition
 Technology and Skills
 Labor and Product Market Characteristics
 Financialization (?)
 Measuring the Labor Share
 Sectoral Measuring Issues and Multinationals
 Labor Income in National Accounts
Financialization and Measuring the Labor Share 11/3/2012

10. Explaining the Labor Share III
10
 Product Market Characteristics
 Bargaining Power of the Firm
 Product Market Regulation
 Privatization
 Globalization
 Labor Market Characteristics
 BargainingPower
 Labor Market Regulation
Financialization and Measuring the Labor Share 11/3/2012

11. Outline
11
 Explaining the Labor Share
 Sectoral Composition
 Technology and Skills
 Labor and Product Market Characteristics
 Financialization
 Measuring the Labor Share
 Sectoral Measuring Issues and Multinationals
 Labor Income in National Accounts
Financialization and Measuring the Labor Share 11/3/2012

12. Explaining the Labor Share IV
12
 Financialization
 Financial Sector Growth
 Output and profits
 Financializing Non-Financial Sector
 Shareholder-value orientation
 Financialization of Labor
 Retirement tied to financial market performance
 Changing employment characteristics
 Pay based on financial performance
 Financial Market Exposure of Households
 Consumer credit, mortgage credit, student loans etc.
 Macroeconomic Instability and Public Finance
Financialization and Measuring the Labor Share 11/3/2012

13. Explaining the Labor Share V
13
 Growth of FIRE
 Bigger weight in sectoral aggregation: LS↓
 Higher share of “skilled” workers: LS↓
 Financialization of Non-financial Businesses
 Retained Profits vs. Rentier Income  AD
 Labor vs. Capital Income
 Shift to more capital intensive production: LS↓
 Reduced bargaining power of labor: LS↓
 Increased mobility, reallocation of production: LS↓
 Tax avoidance and transfer pricing: LS ↑
 Financialization of Labor
 Employer-based pensions: LS~, non-wage LS~
 Changing employment characteristics: LS~
 Employee Stock Options and Bonuses: LS~, wage LS ↑
Financialization and Measuring the Labor Share 11/3/2012

14. Outline
14
 Explaining the Labor Share
 Sectoral Composition
 Technology and Skills
 Labor and Product Market Characteristics
 Financialization (?)
 Measuring the Labor Share
 Sectoral Measuring Issues and Multinationals
 Labor Income in National Accounts
Financialization and Measuring the Labor Share 11/3/2012

15. Measuring the Labor Share I
15
 Sectoral Measuring Issues
 Government Sector
 VA= Wages & Salaries + Fixed Capital Consumption
 No Capital Income
 Indirect Taxes and Subsidies?
 Housing/Real Estate
 Owner-occupied housing
 Imputed rents are capital income
 No imputation for labor income
 Mining
 Almost no labor income
 Capital Income determined by current commodity prices
Financialization and Measuring the Labor Share 11/3/2012

16. Measuring the Labor Share II
16
 Financial Services
 Measurement of Implicit Services (FISIM)
 User-Cost Method
 Reference Interest Rate
 Risk-free or equivalent risk?
 Securitization: off-balance sheet items not in NA
 Treatment of Hedge Funds
 International Differences
 Not in NA in UK, part of the household sector in USA
 Measurement of Constant-Price Output
 Deflated Balances
 Counts
 Treatment as Intermediate Input of Final Consumption
 Mortgage Credits
Financialization and Measuring the Labor Share 11/3/2012

17. Measuring the Labor Share III
17
 Financial Services II
 Risk-free interest rates
 20-40 % overstatement of financial services VA
 0.16-0.3 % overstatement of GDP
 For US: Basu, Inklaar, and Wang 2011
 For Euro-Zone: Colangelo and Inklaar 2010
 Implications for LS
 Changing sectoral weights: LS ↑
 Turn to consumer finance: larger output effect of finance
 Missing financial crises?
 Absence of securitized items, mortgages as (final
consumption) and certain financial institutions
 Caution with international comparisons
Financialization and Measuring the Labor Share 11/3/2012

18. Measuring the Labor Share IV
18
 Multinationals
 Global allocation of production profits via
 Global Supply Chains and Transfer Pricing: LS↓
 $53 billion lost tax revenue in 2002 due to transfer pricing
(Pak and Zdanowicz 2002)
 Special Purpose Entities & Offshore Tax Havens: LS↓
 25 % of German financial assets abroad in top 7 tax
havens (Hebous, 2011)
 U.S. multinational firms had about $639 billion of untaxed
earnings offshore (Financial Times, 03/27/2004)
 International Transactions of Intellectual Property: LS↓
Financialization and Measuring the Labor Share 11/3/2012

19. Outline
19
 Explaining the Labor Share
 Sectoral Composition
 Technology and Skills
 Labor and Product Market Characteristics
 Financialization (?)
 Measuring the Labor Share
 Sectoral Measuring Issues and Multinationals
 Labor Income in National Accounts
Financialization and Measuring the Labor Share 11/3/2012

20. Measuring the Labor Share V
20
 Labor Income in National Accounts
 Self-Employment Income
 Debate about Labor Income Imputations
 Human Capital
 Raw Labor Share vs. Human Capital Share
 IntangibleCapital
 Top Income Shares
 Deducting top incomes: top 1%, supervisory workers
 Employee Stock Options
 Insurance Contributions
Financialization and Measuring the Labor Share 11/3/2012

21. Measuring the Labor Share VI
21
 Intangible Capital
 Intermediate Consumption  Investment
 Business investment in computerized information
 Innovative property
 “Economic competencies”
 Investment in firm-specific human and structural
resources
 Adds another dimension to capital income
 Implications for LS
 Reduction of current LS by 10%points, and growing
Financialization and Measuring the Labor Share 11/3/2012

22. Measuring the Labor Share VII
22
 Employee Stock Options
 Almost perfect correlation between
 Top 1%’s wage share
 CEO compensation
 Stock market performance
 (and regional inequality)
 In 2000 2.5% of total employee compensation
 90.5 % went to employees below the top 5 executives
 Counted as labor income at time of exercise
 Should be counted at time and level of granting
 Difference should be capital gains (Moylan, 2008)
 Implications for the Labor Share
 Changes based on stock market performance  volatility
 Hybrid Income
Financialization and Measuring the Labor Share 11/3/2012

23. Wrap Up
23
 Numerous untested relations between
financialization and the labor share
 Measuring finance and sectoral composition
 MNCs, financialized non-financial firms and LS
 Intangible Capital and the capital share
 Employee Stock Options and LS
Financialization and Measuring the Labor Share 11/3/2012

24. 24 Thank you for your attention!
Contact:
Bert Azizoglu
bertazizoglu@gmail.com
Financialization and Measuring the Labor Share 11/3/2012