Capital account openness and the labour share of income

This paper investigates the relationship between capital account openness and the share of labour in national income. Employing a new index of financial openness and a cross-country panel of labour shares available from the United Nations System of National Accounts, the author shows a robust negative correlation between the degree of openness and the labour share. Although this effect is not present for low income countries, the direct negative relationship holds for all other subsamples and in the presence of a variety of controls. A plausible explanation is that openness alters the conditions of bargaining between labour and capital. By increasing the bargaining strength of capital vis-a-vis labour, increased capital mobility raises rents accruing to capital. Thus, capital account openness may reduce labour’s share of income in the firm, and thereby, at an economy-wide level, its share of national output.