Working Paper: NBER ID: w31168
Authors: 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.
Keywords: International Financial Diversification; Labor Share; Risk Sharing; Reallocation; Firm-Level Data
JEL Codes: F2; F21; F23; F4; F66
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| international financial diversification (F30) | reallocation of labor towards riskier, low labor share firms (J29) |
| reallocation of labor towards riskier, low labor share firms (J29) | decrease in aggregate labor share (E25) |
| international financial diversification (F30) | decrease in aggregate labor share (E25) |
| risk-sharing opportunities (D16) | reallocation of labor towards riskier, low labor share firms (J29) |
| reallocation of labor towards riskier, low labor share firms (J29) | net reduction of corporate labor share in the US (D33) |