3. GVCs and labor income share

Participation in GVCs is regarded as another important factor in reducing labor income share; several works have focused on this issue (e.g., [6, 8]).

In the case of developing countries, the R-squared value is low and GVCs do not have a significant impact on labor income shares. This does not mean there is no relationship between GVCs and labor income shares in developing countries. In fact, the participation index should be modified to make a comparison with labor income share evolution. This aspect will be

Figure 4. Changes in the GVCs participation index (x-axis) and changes in labor income share (y-axis) for developed and

The Declining Labor Income Shares Revisited: Intersectoral Production Linkage in Global Value Chains

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29

What is the mechanism whereby GVCs expansion changes labor income shares? Dao et al. [6] hypothesize that a participation in GVCs can reduce labor income share through the mecha-

1. In developed countries, many tasks for which labor is substitutable by capital are automated with a steep decline in the relative price of investment goods. Thus, the degree of capital deepening increases and the labor income share decreases. This implies that tasks with low elasticity of substitution between capital and labor are likely to be offshored in GVCs. 2. In developing countries, the offshored tasks from developed countries with low substitutability between capital and labor will have a high capital share. It follows that GVCs can shift the composition of production to tasks with higher capital shares, thus lowering the

Dao et al. [6] examine the empirical relation between the trend in labor shares and technology, economic global integration, and other factors. As explanatory variables, they adopt (1) the relative price of investment goods to proxy for firms' incentives for capital-labor substitution, (2) the extent of initial exposure to routinization (high initial exposure to routinizable jobs will lead to greater adoption of routine technology and thereby lower labor income shares), (3) the evolution of globalization (exports and imports in percent of GDP, GVCs participation, and changes in financial globalization), and (4) policy and institutional factors (e.g., changes in labor union density, employment protection legislation). As for

discussed later.

developing countries.

nism described as follows:

average labor share in developing countries.

A value chain is a series of value-added processes that are involved in the production of any goods or service. GVCs or production networks are divided into discrete steps—moving from upstream to downstream production stages—and locate in different countries that actively trade intermediate (partially finished) goods. This type of production is known as fragmentation, and the trade of intermediate goods is categorized as intraindustry and intrafirm trade.

The degree of GVCs expansion is usually measured by the "GVCs participation index." This index is calculated as a sum of the forward participation index—the share of exported goods and services used as imported inputs to produce other countries' exports—and the backward participation index—the share of imported inputs in the overall exports of a country. In GVCs, a supplier in a country exports and imports half-finished goods; therefore, the extent of its participation in the GVCs can be measured as a sum of its forward and backward linkages. These data are derived from the OECD-WTO Trade in Value-Added (TiVA) database.

As Takeuchi [9] has documented, GVCs have been expanding worldwide since the late 1990s, especially in East Asian countries. This coincides with the period of a significant downward trend of labor income share, as pointed out by Young and Tackett [3]. This chapter also analyzes the same period.

Figure 4 indicates the relation between the changes in the GVCs participation index and those in labor income share in the same manner as Figures 1–3. The R-squared values are relatively higher than those in the previous figures, and it is observed that expanding GVCs has a significant negative impact on labor income shares in developed countries.

The Declining Labor Income Shares Revisited: Intersectoral Production Linkage in Global Value Chains http://dx.doi.org/10.5772/intechopen.81316 29

developed countries; however, we cannot find any relation in the case of developing countries. The same conclusion is obtained in Figure 2, which compares the import GDP ratio and labor

Figure 3 indicates the relation between the external assets and liabilities GDP ratio (financial globalization index) and labor income share in the same manner as in Figures 1 and 2 (data source is [7]). In this case, we cannot find any significant relationship. These three figures are a very simple analysis that just compare one economic globalization-related variable and labor income share. One reason to take such a simple method is that it is difficult to consider these variables as distinct drivers of labor shares. In reality, the effects of these three factors on labor shares cannot be fully isolated. More elaborate studies should be conducted in the future. At this moment, it can be concluded that trade and financial integrations as economic globalization factors do not affect labor income share evolution with the exception of trade (export and import) in developed countries. The negative relation between changes in trade GDP ratios and those in labor income shares is consistent with the prediction of Heckscher-Ohlin model as

Participation in GVCs is regarded as another important factor in reducing labor income share;

A value chain is a series of value-added processes that are involved in the production of any goods or service. GVCs or production networks are divided into discrete steps—moving from upstream to downstream production stages—and locate in different countries that actively trade intermediate (partially finished) goods. This type of production is known as fragmentation, and the trade of intermediate goods is categorized as intraindustry and intrafirm trade. The degree of GVCs expansion is usually measured by the "GVCs participation index." This index is calculated as a sum of the forward participation index—the share of exported goods and services used as imported inputs to produce other countries' exports—and the backward participation index—the share of imported inputs in the overall exports of a country. In GVCs, a supplier in a country exports and imports half-finished goods; therefore, the extent of its participation in the GVCs can be measured as a sum of its forward and backward linkages.

These data are derived from the OECD-WTO Trade in Value-Added (TiVA) database.

significant negative impact on labor income shares in developed countries.

As Takeuchi [9] has documented, GVCs have been expanding worldwide since the late 1990s, especially in East Asian countries. This coincides with the period of a significant downward trend of labor income share, as pointed out by Young and Tackett [3]. This chapter also

Figure 4 indicates the relation between the changes in the GVCs participation index and those in labor income share in the same manner as Figures 1–3. The R-squared values are relatively higher than those in the previous figures, and it is observed that expanding GVCs has a

income share changes.

28 Globalization

mentioned earlier in this section.

analyzes the same period.

3. GVCs and labor income share

several works have focused on this issue (e.g., [6, 8]).

Figure 4. Changes in the GVCs participation index (x-axis) and changes in labor income share (y-axis) for developed and developing countries.

In the case of developing countries, the R-squared value is low and GVCs do not have a significant impact on labor income shares. This does not mean there is no relationship between GVCs and labor income shares in developing countries. In fact, the participation index should be modified to make a comparison with labor income share evolution. This aspect will be discussed later.

What is the mechanism whereby GVCs expansion changes labor income shares? Dao et al. [6] hypothesize that a participation in GVCs can reduce labor income share through the mechanism described as follows:


Dao et al. [6] examine the empirical relation between the trend in labor shares and technology, economic global integration, and other factors. As explanatory variables, they adopt (1) the relative price of investment goods to proxy for firms' incentives for capital-labor substitution, (2) the extent of initial exposure to routinization (high initial exposure to routinizable jobs will lead to greater adoption of routine technology and thereby lower labor income shares), (3) the evolution of globalization (exports and imports in percent of GDP, GVCs participation, and changes in financial globalization), and (4) policy and institutional factors (e.g., changes in labor union density, employment protection legislation). As for economic globalization factors, financial integration and GVCs participation appear to matter for labor shares, but trade factor does not.

The researchers' regressions examine the empirical relationship between labor shares and GVCs by adopting only the GVCs participation index and not including other variables like the elasticity of substitution between capital and labor, factor-augmenting technological changes, and the rate of capital deepening, which are theoretically related to labor shares as previously mentioned. Instead, their paper compares changes in GVCs participation and those of the rate of capital deepening for developed and developing countries separately. The result shows that a rising GVCs participation is associated with rising capital deepening in both developed and developing countries, but the degree of impact of GVCs is larger in developing countries. What could be the reasons for that?

This study examines the mechanism of how GVCs participation works to promote capital deepening in developing and developed countries. This is an important innovation and contribution of this study. We use data of labor income shares and capital deepening for two different sectors (services and nonservices) for this analysis. For developing countries, there are significant data constraints; however, by using GDP, GDP deflators, and employment data for each industry, we can analytically calculate sectoral factor shares and relative capital deepening rates. The details of calculation procedures and data sources are presented in Appendix.

The estimated coefficients are almost identical between developed and developing countries, as shown in the figure. Also, the relation between the two variables is statistically significant and the R-squared values are relatively high. We have already overviewed the theoretical relation between the rate of capital deepening and labor income shares in the previous section. These results affirm the importance of analyzing this relationship by separating the services

Figure 6. Changes in the GVCs participation index (x-axis) and changes in the relative rate of capital deepening of the

The Declining Labor Income Shares Revisited: Intersectoral Production Linkage in Global Value Chains

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31

services sector to the nonservices sector (y-axis). Gross rate between 1995 and 2011.

In comparison, what is the relationship between expansion of a GVCs and the relative capital deepening rate of the services sector? There is a positive relation between these two in the case of developing countries, and conversely, there is a negative relation in the case of developed countries. These opposite results between the two country groups seem to be important in the light of their statistical significances and high R-squared values (as shown in Figure 6).

The analytical results can be summarized as follows. The expansion of GVCs has a potential to account for a decline in the rate of capital deepening and thus increases the labor income shares of the services sector relative to the nonservices sector in developed countries. In the case of developing countries, the opposite mechanism works: the GVCs participation increases

the relative rate of capital deepening and decreases the relative labor income shares.

4. What are reasons behind the differences between developed and

Why are there differences between developed and developing countries in terms of the relations among GVCs participation, capital deepening, and labor income shares? To answer this question, we analyze the effect of GVCs participation on the rate of capital deepening in the services and nonservices sectors separately. The results are as follows. In developed countries,

and nonservices sectors.

developing countries?

Figure 5 shows the relation between changes in the relative rate of capital deepening of the services sector to the nonservices sector (horizontal axis, gross rate between 1995 and 2011) and relative labor income shares (vertical axis, gross rate between 1995 and 2011) for 22 countries (South Africa, China, India, Japan, South Korea, Malaysia, Philippines, Taiwan, Thailand, Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, the United States, Denmark, Spain, France, the United Kingdom, Italy, and the Netherlands). Among them, 11 countries are OECD members (categorized as developed countries).

Figure 5. Changes in the relative rate of capital deepening of the services sector to the nonservices sector (x-axis) and changes in the relative labor income share (y-axis) for developed and developing countries.

The Declining Labor Income Shares Revisited: Intersectoral Production Linkage in Global Value Chains http://dx.doi.org/10.5772/intechopen.81316 31

economic globalization factors, financial integration and GVCs participation appear to

The researchers' regressions examine the empirical relationship between labor shares and GVCs by adopting only the GVCs participation index and not including other variables like the elasticity of substitution between capital and labor, factor-augmenting technological changes, and the rate of capital deepening, which are theoretically related to labor shares as previously mentioned. Instead, their paper compares changes in GVCs participation and those of the rate of capital deepening for developed and developing countries separately. The result shows that a rising GVCs participation is associated with rising capital deepening in both developed and developing countries, but the degree of impact of GVCs is larger in developing

This study examines the mechanism of how GVCs participation works to promote capital deepening in developing and developed countries. This is an important innovation and contribution of this study. We use data of labor income shares and capital deepening for two different sectors (services and nonservices) for this analysis. For developing countries, there are significant data constraints; however, by using GDP, GDP deflators, and employment data for each industry, we can analytically calculate sectoral factor shares and relative capital deepening rates. The details of calculation procedures and data sources are presented in Appendix.

Figure 5 shows the relation between changes in the relative rate of capital deepening of the services sector to the nonservices sector (horizontal axis, gross rate between 1995 and 2011) and relative labor income shares (vertical axis, gross rate between 1995 and 2011) for 22 countries (South Africa, China, India, Japan, South Korea, Malaysia, Philippines, Taiwan, Thailand, Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, the United States, Denmark, Spain, France, the United Kingdom, Italy, and the Netherlands). Among them, 11 countries are OECD

Figure 5. Changes in the relative rate of capital deepening of the services sector to the nonservices sector (x-axis) and

changes in the relative labor income share (y-axis) for developed and developing countries.

matter for labor shares, but trade factor does not.

30 Globalization

countries. What could be the reasons for that?

members (categorized as developed countries).

Figure 6. Changes in the GVCs participation index (x-axis) and changes in the relative rate of capital deepening of the services sector to the nonservices sector (y-axis). Gross rate between 1995 and 2011.

The estimated coefficients are almost identical between developed and developing countries, as shown in the figure. Also, the relation between the two variables is statistically significant and the R-squared values are relatively high. We have already overviewed the theoretical relation between the rate of capital deepening and labor income shares in the previous section. These results affirm the importance of analyzing this relationship by separating the services and nonservices sectors.

In comparison, what is the relationship between expansion of a GVCs and the relative capital deepening rate of the services sector? There is a positive relation between these two in the case of developing countries, and conversely, there is a negative relation in the case of developed countries. These opposite results between the two country groups seem to be important in the light of their statistical significances and high R-squared values (as shown in Figure 6).

The analytical results can be summarized as follows. The expansion of GVCs has a potential to account for a decline in the rate of capital deepening and thus increases the labor income shares of the services sector relative to the nonservices sector in developed countries. In the case of developing countries, the opposite mechanism works: the GVCs participation increases the relative rate of capital deepening and decreases the relative labor income shares.
