Democracy and the Labor Share of Income: A Cross-Country Analysis | Asian Development Bank

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Democracy and the Labor Share of Income: A Cross-Country Analysis

Publication | January 2019
Democracy and the Labor Share of Income: A Cross-Country Analysis

Income distribution is determined by factors that change substantially across countries but are persistent over time.

Summary statistics on the labor share of income show that between-country variation is much greater than within-country variation: functional income distribution is determined by factors which change substantially across countries but are persistent over time. We attempt to shed some light on the long-run and political economy determinants of the labor income share. We revisit and extend previous empirical research on democratic political institutions and the labor share using a dataset of 112 countries over 1970–2015. Our empirical analysis shows that democracy allows workers to appropriate a higher share of national income. The evidence is robust to different indices of democracy and different periods of time, and after performing instrumental variable estimation. These results are particularly relevant today, in light of the recent global decline in the labor income share and current crisis of democracy.

WORKING PAPER NO: 919