Capitalism and Labor Shares: A Cross-Country Panel Study

Abstract

We examine the empirical relationship between the institutions of economic freedom and labor shares in a panel up to 93 countries covering 1970 through 2009. We find that a standard deviation increase in the Fraser Institute’s Economic Freedom of the World (EFW) score is associated about 1/3 standard deviation increase in a country’s labor share. Starting from the sample mean labor share in our panel, this amounts to about 4.26 percentage points. This relationship is robust to considering OECD and non-OECD samples separately. It is also (both qualitatively and quantitatively) robust to controlling for differences in human capital levels, labor productivity, trade union density, and international economic flows. Breaking the EFW into its individual component areas, the regulation of credit, business and labor appears to be the most important source of the positive EFW-labor share relationship.

Keywords: labor share, income shares, economic freedom, political economy, democracy, capitalism, institutions, distribution of income

JEL Classification: P10, P16, D33, E02, O10