Can Globalisation Benefit All? Research Project
Globalisation and Rent Sharing
Principal Investigator: Professor Steve Machin
Steve 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).
Stagnating real wages and falling labour share across developed economies have challenged traditional paradigms in macroeconomics and have generated a renewed interest in the question of how rents are shared with labour. Globalisation has been identified as the major driving force behind the falling share of income going to labour. The literature has focused on the role of technology, factor prices and industry composition. Surprisingly, to date relatively little attention has been paid to the effect of globalisation on the bargaining power of workers.
This project wishes to link the macroeconomic trends with the micro-level insights from labour economics and political science, by exploring how the exposure to globalisation affects workers’ bargaining power and thus their capacity to capture economic rents. Globalisation might affect the position of workers through two channels. First, being a part of the global value chains, foreign investors or multinational companies do not build a supply chain in the host countries, which limits productivity spillovers into domestic sectors. This can break, or temper, the connection between the productivity of the company and the domestic demand for labour. With low domestic wages, trade-involved companies are facing relatively weak upward pressure on their own wages even though they earn higher profit margins. Second, when firms offshore part of their production, they tend to reallocate domestic workers and output from manufacturing to other sectors. The relocated workers might have lower bargaining power in the new sector because of weaker unionization, lower demand for specific human capital or higher competition from the providers of business services (i.e. creating the threat of domestic outsourcing). Overall, the two mechanisms imply that globalisation might weaken connection between firm profits and wages, and so result in lower rent sharing.
Our proposal is to estimate a reduced form effect of globalisation on bargaining power of workers in two steps. First, for each year-industry-country we will estimate the elasticity of firm’s wages with respect to profits (rent-sharing coefficient). Second, we will regress these measures on the measures of exposure to globalisation. The relative importance of the aforementioned mechanisms will be also explored. The analysis will draw on firm-level data from the historical files of Bureau van Dijk’s Orbis and industry-level data from OECD, EU-KLEMS and the World I-O tables.
The first potential contribution of this project is that we empirically test whether the bargaining position of workers (rent sharing) is affected by globalisation – a claim made by many, but which has not been rigorously explored in the literature. The findings might help to explain why developed economies have recently experienced falling labour share, real wage stagnation and growth decoupling between wage and productivity. The second potential contribution is to generate a better understanding of how the effect of local labour markets on wages changes when companies develop international global value chains. For instance, there might be a risk that a dual-economy, with high-productive multinational companies and low-productive domestic companies, 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 and innovativeness of these parts of economy, which are not directly involved in trade networks. The aim is that the results from this project would be informative for discussions surrounding the scope for corporate and industrial policies to boost productivity and innovation with a goal of securing equitable growth.