Globalization, Creative Destruction, and Labor Share Change: Evidence on the Determinants and Mechanisms from Longitudinal Plant-level Data Petri Böckerman (Labour Institute for Economic Research) Mika Maliranta (The Research Institute of the Finnish Economy) Työsuojelurahasto on rahoittanut tätä tutkimusta.

1. Introduction The labor share of value added has declined in several industrialized countries. Globalization has potential influences on the labor share through several channels: -a. Increase of competition, b. Increase of required return to capital, c. Bargaining power of labor decreases, d. Specialization into the production of capital-intensive goods, e. Adoptation of labor-saving technologies.

1. Introduction The literature has taken advantage of cross-country data sets (emphasis on the institutional features). The Curse of Dimensionality is evident in cross-country studies. Some evidence that the exposure to international trade is associated with a decline in the labor share. This paper argues that it is useful to analyze the effects of globalization by using panel data of regions and industries from one country. This is the second-best choice, because the best one would be to use plant-level data from several countries. We show that there are large differences in the micro-level dynamics of the labor share across regions within the same country that share exactly the same institutions and regulations.

1. Introduction There are large differences in the evolution of the labor share across the Finnish regions (and industries) (see Fig. 1). We focus on the effects of intra-industry restructuring. Is there a systematic structural change in terms of value added towards those plants that have a lower labor share because of the increasing globalization?

Figure 1. The labor share by region.

2. Decomposition The aggregate labor share declines when aggregate labor productivity growth exceeds aggregate wage growth (measured in nominal terms). Change in industry labor share == within plants + micro- level restructuring Micro-level restructuring == between component + entry + exit + convergence term The within component is defined as the weighted average of the changes in the labor shares of the continuing plants. The between component is negative when there is a systematic structural change among continuing plants in terms of value added towards those plants that have a lower labor share. We also analyze the evolution of labor productivity growth and wage growth by using similar decomposition.

2. Decomposition dW =wh(W)+str(W) -dP =-wh(P)-str(P) dF =wh(F)+str(F) str(X)=ent(X)+exit(X)+bw(X)+cv(X) X = {W, P, F}

3. Data Plant-level data of Finnish manufacturing industries We construct a panel of micro-level components of the labor share change (12 industries, 4 regions and 30 years). Globalization is measured by two variables, which capture the exposure to international trade and foreign ownership.

4. Results There are large differences in the evolution of the micro-level components of the labor share across regions. The measures of globalization have evolved differently across regions. For example, the exposure to international trade has increased most rapidly in Northern Finland.

4. Results We estimate OLS regressions over the period (1316 observations). We explain the changes in the labor share, labour productivity and wages and their micro-level components. Explanatory variables are the measures of globalization (lagged by one year) and the indicators for years and industries.

4. Results We find that increasing exports lowers the labor share. The greatest part of this effect can be attributed to the micro-structural component. Hence, there is evidence of a systematic structural change in terms of value added towards those plants that have a lower labor share because of the increasing exposure to international trade. However,increasing exports are not associated with the growth rate of wages. Instead, the evidence shows that exports increase aggregate labor productivity growth through restructuring.

4. Results The export share has increased more than 20 percentage points over the last three decades. According to our estimates this would lead to a decline in the labor share by 10 percent (or 5-6 percentage points), of which 40 percent takes place through intra-industry restructuring.

5. Summary Globalization squeezes the labor share because of increasing labor productivity. This effect is caused by restructuring towards plants with a lower labor share. Wage growth remains (largely) unaffected.