Can Globalisation Benefit All? Research Project
Globalisation and Rent Sharing
Principal Investigator: Professor Stephen Machin
Stephen Machin is a Professor in Economics at the London School of Economics, director of the Centre for Economic Performance, fellow of the British Avademy, and fellow of the Society of Labour Economists. He obtained a PhD from the University of Warwick in 1988 on ‘The Impact of Unions on Economic Performance: Empirical Tests Using British Micro-Data.’ Since then, he has worked at UCL, Harvard, NBER, and MIT. Steve has also published extensively in the areas of Labour, Education, Crime and Industrial Economics.
Co-Investigators: Professor David Soskice (LSE) and Dr Pawel Bukowski (LSE).
Rising wage dispersion, a falling labour share of income and stagnating real wages have been recently re-connected with two major labour market trends. The first is the growing labour market power of firms and the falling bargaining power of workers, and the second is that globalisation might be also responsible for the profound changes in the distribution of income (e.g. a Stolper Sammuelson effect). Are these two seemingly distinct explanations of rising income inequality connected? Surprisingly, to date relatively little attention has been paid to the relationship between globalisation and the balance of power between workers and firms.
This project seeks to understand basic empirical patterns in the balance of power in the European manufacturing labour market and its connection to the forces of globalisation. To this end we use a concept of rent sharing, that is, a firm-level relationship between individual firms’ economic rents and wages. While it is theoretically unclear whether rent sharing reflects the labour market power of firms or bargaining power of workers, we propose a novel method to identify the latter.
The first set of results provides robust evidence for positive rent sharing. This is, however, much weaker today than it was before 2008. The second set of results shows that around one-third of the level of rent sharing elasticity can be linked with the labour market power of companies (i.e., monopsonistic competition), and two-third with the decline in bargaining power of workers. The fall of rent sharing is driven equally by the two channels.
Finally, we show that the participation in global value chains (GVC) matters more for the balance of power than direct trade. Outsourcing of production to foreign suppliers through GVC and exporting activities are positively associated with the competitiveness of labour markets by reducing the power of both firms and workers. Conversely, outsourcing to domestic suppliers is connected with less competitive labour markets, through the stronger monopsonistic power of firms and bargaining power of workers. Somehow surprisingly, we find that import penetration does not influence the balance of power on the labour market.
Findings of this paper speak for the profound change in the competitiveness of labour markets, driven by the fall of the bargaining power of workers and a fall in the monopsonistic power of firms. We connect these patterns with the development of global value chains and exporting activities. What remains to be understood is the reasons why the effect of economic rents on wages changes when companies engage in trade networks.
There are several policy implications of this paper. For instance, there might be a risk that a dual-economy, with high-productive multinational companies operating on competitive markets, and low-productive domestic companies endowed with a wage-setting power, limits the extent to which benefits that accrue from globalisation are shared with labour. If this is the case, policy should then focus on improving productivity, innovativeness and competitiveness of these parts of economy, which are not directly involved in trade networks. On the other hand, reinforcing unions and employment protection law in sectors exposed to globalisation might protect the workers’ bargaining power with a goal of securing equitable growth.
Globalisation and Rent Sharing
Pawel Bukowski, Stephen Machin, and David Soskice | August 27, 2020