Labour Share and Development

Mardi | 2014-04-15
Sully 5


We highlight a U-shaped relationship between development and the labor share of income. We exploit the within dimension of a panel dataset for the wage bill and value added in the manufacturing sector for developing countries. Data is available at the aggregate manufacturing level and also at the desaggregate level for 28 manufacturing sub sectors. We show that the U-shaped pattern of the labor share we observe at the aggregate level is also observed at the sub sector level suggesting it’ does not correspond to reallocation forces across sector that occur during the development process. Our theory emphasizes the role of firms’ monop-sony power when labor market has frictions in a dual labor market in which modern and high productivity firms coexist with low productivity and traditional firms. At first stages of development, productivity gains are not compensated by wage increases, as most of workers’ outside opportunities depend on the low productivity traditional sector. At later stages, the labor share increases as a result of wage competition in the modern sector.