Investment and labor income shares

Abstract

We explore empirically the determinants of labor shares focusing on the role of investment. We use a cross-country framework and consider up to 99 countries for the period 2004–2015. Our results reveal that the level of a country’s investment is a significant driving factor of the labor share of income. This evidence is in line with the predictions of neoclassical mechanisms for the role of investment in labor share. Among several other factors that we consider, as suggested by the extant empirical literature, we find strong evidence only for the degree of a country’s exposure to the international financial system, which is inversely related to the labor shares. Moreover, economic freedom amplifies the positive effect of gross fixed capital formation on labor income shares.