International Diversification, Reallocation, and the Labor Share

68 Pages Posted: 24 Apr 2023

See all articles by Joel Michael David

Joel Michael David

Federal Reserve Bank of Chicago

Romain Rancière

University of Southern California

David Zeke

University of Southern California - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 21, 2023

Abstract

How does growing international financial diversification affect firm-level and aggregate labor shares? We study this question using a novel framework of firm labor choice in the face of aggregate risk. The theory implies a cross-section of labor risk premia and labor shares that appear as markups in firm-level data. International risk sharing leads to a reallocation of labor towards riskier/low labor share firms alongside a rise in within-firm labor shares, matching key micro-level facts. We use cross-country firm-level data to document a number of empirical patterns consistent with the theory, namely: (i) riskier firms have lower labor shares and (ii) international financial diversification is associated with a reallocation towards risky/low labor share firms. Our estimates suggest the reallocation effect has dominated the within effect in recent decades; on net, increased financial integration has reduced the corporate labor share in the U.S. by about 2.5 percentage points, roughly one-third of the total decline since the 1970s.

Keywords: international diversification, international risk-sharing, reallocation, labor share

JEL Classification: E24, E25, E44, F21, F4, F62, F66, G15

Suggested Citation

David, Joel Michael and Rancière, Romain and Zeke, David, International Diversification, Reallocation, and the Labor Share (April 21, 2023). FRB of Chicago Working Paper No. 2023-16, Available at SSRN: https://ssrn.com/abstract=4425719 or http://dx.doi.org/10.2139/ssrn.4425719

Joel Michael David (Contact Author)

Federal Reserve Bank of Chicago

230 South LaSalle Street
Chicago, IL 60604
United States

Romain Rancière

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

David Zeke

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

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