5. Conclusion

to be offshored from developed to developing countries. For developed countries, because the offshored tasks are labor intensive, the composition of production in these countries becomes more capital intensive. As Dao et al. [6] point out, many tasks left in developed countries are substitutable by capital, contrasting to offshored tasks with low elasticity of substitution between capital and labor. As a result, the tasks left in developed countries are automated with the help of a steep decline in the relative price of investment goods, and thus, the labor

Figure 8. The mechanism by which GVCs participation promotes capital deepening and decreases labor income share in

On the other hand, in developing countries, the services sector promotes capital deepening and an increasing involvement in GVCs. This is because nonservices tasks are offshored from developed to developing countries and demand for services as intermediate input to these tasks increases in recipient developing countries. The capital deepening is promoted also in the nonservices sector, and thus, total economy experiences a progression of capital deepening. As

In Figure 4 indicating the relation between the changes of GVCs participation index and those of macrolabor income shares, we found that expanding GVCs has a significant impact on labor income share in developed countries. In developing countries, however, the same negative relationship cannot be clearly observed. The reason for this result can be interpreted as follows. In developing countries, GVCs have a profound capital deepening effect on the services sector but not the nonservices sector. Developing countries vary in terms of the share of services in the total economy, and thus, the capital deepening effect that GVCs have on the macroeconomy may become large in economies with a large share of services and small in

As a modified version of Figure 4 in which changes in labor income shares are compared with the changes in the GVCs participation index, the following estimation for developing countries

discussed in Section 2, capital deepening results in lower labor income share.

income share decreases.

developed and developing countries.

34 Globalization

economies with a small share of services.

This chapter focuses on GVCs as an important determinant of changes in the labor income share and analyzes the mechanism responsible for the share decline under GVCs in developing countries. This mechanism has not been documented in prior studies. The crucial mechanism is that intersectoral production linkage between the services and nonservices sectors promotes capital deepening in the services sector, and this leads to the decline of the macrolabor income share. In developing countries, labor-intensive nonservices (especially manufacturing) tasks have been offshored from developed countries in GVCs since the late 1990s. The services sector in developing countries actively accumulates capital to supply quality services to the inflowing nonservices tasks, while the nonservices sector also promotes capital accumulation under severe international competition. As a result, a developing country raises its rate of capital deepening significantly in this period and thus, decreases the labor income share, as the theory predicts. This mechanism can be analyzed by utilizing the data of sectoral labor income shares and the sectoral rate of capital deepening for developing and developed countries. Preceding studies have rarely used the kind of comprehensive dataset used in this study and have rarely discussed intersectoral linkages between the services and nonservices sectors as important determinants of changes in macroeconomic labor income shares.
