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International Diversification, Reallocation, and the Labor Share

Author

Listed:
  • Joel M. David
  • Romain Rancière
  • David Zeke
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.

Suggested Citation

  • Joel M. David & Romain Rancière & David Zeke, 2023. "International Diversification, Reallocation, and the Labor Share," NBER Working Papers 31168, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31168
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    References listed on IDEAS

    as
    1. Ezra Oberfield & Gene M. Grossman, 2022. "The Elusive Explanation for the Declining Labor Share," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 93-124, August.
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    More about this item

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor

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