Rentiers and financialisation. Workers are stuck between a rock and a hard place. The authors look at how financialisation have affected wages. It is not as dry a topic as it might first seem.
Karsten Kohler is lecturer at King’s College London
Alexander Guschanski is lecturer at University of Greenwich
Engelbert Stockhammer is professor at King’s College London
The last four decades have been characterised by drastic changes in the distribution of income between wages and profits. Between 1975 and 2014, the wage share, which measures the share of national income going to wage earners, has on average fallen from 72% to 63% in 14 OECD countries. In the same period, we observe a phenomenon often dubbed ‘financialisation’. Financialisation comprises a diverse range of phenomena, including financial deregulation, securitisation, shareholder value orientation, and increasing household debt. While some studies have found negative impacts of single measures of financialisation on the wage share (here, here, and here), they have not fully accounted for the fact that financialisation has several dimensions, which may impact the wage share through different channels.
In our paper we offer a theoretical clarification of the effects through which financialisation can affect the wage share. We conduct an empirical analysis of 14 OECD countries for the period 1992 to 2014 to assess the impact of financialisation on functional income distribution. We identify four distinct mechanisms through which financialisation may reduce the wage share:
First, enhanced exit options of firms due to financial globalisation may increase their bargaining power vis-à-vis workers. For example, an increased capacity to relocate production abroad will increase the credibility of the firing threat and thus improve the bargaining power of firms. Financialisation has come with a move towards liberalised international financial markets, which increased capital mobility – e.g. by facilitating foreign direct investment. The resulting improvement of firms’ bargaining power may have contributed to the decline in the wage share.
Second, higher financial payments of non-financial businesses, such as interest and dividends, may be rolled over on prices and thereby diminish real wages. It has been argued that financialisation increases the financial costs of firms. For instance, dividend payments rose to satisfy the interests of increasingly dominant shareholders. Firms may have passed on this rise in financial costs to consumers at the expense of real wage incomes.
Third, intensified competition on capital markets can increase the pressure on managers to reduce costs by suppressing wages, downsizing the labour force, and intensifying work . Financialisation has led to a diversification of financial products through the creation of derivatives and the securitisation of debt. Some authors argue that through the pricing of financial assets, such as company shares, the economic efficiency of a firm becomes objectively quantified, which puts firms under a strong pressure to demonstrate their efficiency to ensure rising share prices. This pressure may induce ruthless cost-cutting, especially wage suppression, but also intensification of work with negative distributional effects.
Fourth, rising household debt can make workers more financially vulnerable and undermine working class identities, which weakens worker militancy. Indeed, surging household debt is one of the hallmarks of financialisation. Empirical work has shown that indebted households are more ‘financially vulnerable’, i.e. in danger of not being able to cover expenses for basic consumption and medical care, in case of unexpected payment obligations . Working class households might be worried about their access to credit and about the repercussions of personal bankruptcy, and therefore eager to service their debt. Thereby, debt can translate into decreased militancy during wage negotiations through increased vulnerability to job or income losses. This mechanism should be particularly strong in countries where a relevant share of low-income households are indebted and where the degree of institutional power of labour and the generosity of the welfare state is low.
Several other factors can put downward pressure on the wage share, which we control for in the empirical analysis. First, unemployment reduces the bargaining power of workers. Second, globalisation in trade may also have worsened the bargaining power of workers as it allows firms to offshore production by importing goods that were previously produced at home. Third, it has been argued that the nature of recent technological change had regressive distributional effects. The increasing relevance of information and communication technologies creates a strong demand for a few high-skilled workers, but at the same time makes many low-skilled workers jobless. Fourth, as often claimed by right-wing populists, migration may have negative effects on wages, insofar as migrant workers are willing to work for lower wages than domestic workers.
Overall, we find strong effects of financialisation on functional income distribution which are, taken together, in the same order of magnitude as the effects of globalisation. International financial openness and financial payments of firms have the most robust negative impact on the wage share. Financial openness displays the largest economic effect, followed by financial payments of businesses. Household debt reduces the wage share in countries where it is held by low-income households and where wage bargaining institutions are weak. There is only weak evidence for the effect of competition on capital markets. This confirms the negative effects of financial openness and of financial payments of businesses on the wage share found in previous research that only focused on single measures of financialisation.
Among the non-financialisation variables, we find significant negative effects of trade openness and unemployment. We do not find robust effects of technological change or migration. This suggests that trade globalisation and high unemployment rates have also contributed to the erosion of worker’s bargaining power, while technological change and migration were not relevant.
The decline in the wage share is a dangerous development that has to be addressed by economic policy. Falling wage shares contribute to rising personal income inequality. They indicate that working people get a lower share of the output they produce, while the owners of assets derive higher incomes from their property. This is a worrisome trend, especially given the highly unequal distribution of wealth, which may give rise to increased social tensions and distributional struggles. Falling wage shares, at least in the absence of a real estate bubble, have been shown to have negative effects on consumption and, ultimately, on economic activity in many countries (Lavoie and Stockhammer, 2013). Rising inequality also undermines democracy because the top ten percent have a stronger influence over public policies.
The finding that financialisation in its different dimensions has a negative impact on income distribution has important economic and political implications. Our study shows that the opening of domestic financial markets to international capital flows contributed to an erosion of the wage share. This is particularly interesting in conjunction with our finding of a negative effect of trade openness, and no significant effect of migration. Simply put, wages have stagnated because of an increase in capital mobility, not because of labour mobility. If that is correct, how should we de-financialise? First, reduce capital mobility. Besides progressive distributional effects, there are also benefits for financial stability. Capital inflow controls can enhance financial stability by curbing private credit growth. Second, appropriately designed taxation and corporate regulation can decrease financial payments. This would not only encourage firms to invest in productive capacity rather than maximising shareholder value, but also improve income distribution. This could be achieved through higher taxation of dividend payments and capital gains, and by prohibiting share buybacks. Decoupling executives’ remuneration from share prices and including representatives of employees and the wider public on company boards would support this process. De-financialisation is thus a more effective measure for improving income distribution than the presently popular migration controls and can be macroeconomically beneficial in terms of stability and growth.