Financialization and US Income Inequality, 1970-2008

44 Pages Posted: 4 Nov 2011

See all articles by Ken-Hou Lin

Ken-Hou Lin

University of Massachusetts Amherst

Donald Tomaskovic-Devey

University of Massachusetts at Amherst

Date Written: November 3, 2011

Abstract

Focusing on U.S. non-finance industries, we examine the connection between the financialization of the US economy and rising income inequality. We argue that the increasing reliance by firms on earnings realized through financial channels decoupled the generation of surplus from production, strengthening owners' and elite workers' negotiating power relative to other workers. Moreover, the financial conception of the firm reduced capital and management commitment to production, further marginalizing labor’s role in U.S. corporations. The result was an incremental exclusion of the general workforce from revenue generating and compensation setting processes. Using time-series cross-section data at the industry level, our analysis shows that increased dependence on financial income, in the long run, decreased labor's share of income, increased top executives' share of compensation, and increased earnings dispersion among workers. Net of conventional explanations, including declining unionization, globalization, technological change, and capital investment, the effects of financialization are substantial on all three dimensions of increased inequality. The counterfactual analysis suggests that financialization accounts for more than half of the decline in labor's share of income, 10 percent of the growth in officers' share of compensation, and 15 percent of the growth in earnings dispersion between 1970 and 2008.

Keywords: financialization, income inequality, capital/labor share, exective compensation

JEL Classification: C23, D23, D31, G32

Suggested Citation

Lin, Ken-Hou and Tomaskovic-Devey, Donald, Financialization and US Income Inequality, 1970-2008 (November 3, 2011). Available at SSRN: https://ssrn.com/abstract=1954129 or http://dx.doi.org/10.2139/ssrn.1954129

Ken-Hou Lin (Contact Author)

University of Massachusetts Amherst

Department of Operations and Information Managemen
Amherst, MA 01003
United States

Donald Tomaskovic-Devey

University of Massachusetts at Amherst ( email )

Amherst, 01003
United States
4135454070 (Phone)

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