1. Introduction

The decrease in labor income share has received worldwide attention given that it is frequently associated with income inequality and also affects macroeconomic aggregates. At the enterprise level, wages represent a cost and affect firms' investments. At the household level, wages are a determinant of household consumption [1]. Many studies that have documented the fall in the share have tried to understand the causes. Possible determinants of the changes include

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and eproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

globalization (the expansion of international trade and capital flows), technological change, capital deepening (the amount of real capital present in relation to labor increases), product and labor market institutions, and the bargaining power of labor, among others. This chapter focuses on the global value chains (GVCs) as an important determinant of changes in the labor income share and indicates the mechanism responsible for the share decline under GVCs, which has never been documented in prior studies. We analyze the mechanism by measuring the labor income share at the sectoral level in developing and developed countries.

Assuming that the elasticity of substitution within each sector is constant, the output for sector

where α<sup>i</sup> governs the relative importance of the two inputs, Kit and Lit are capital and labor used in sector i at time t, and σ<sup>i</sup> is the elasticity of substitution between these two inputs. Ait and Bit are the levels of labor- and capital-augmenting productivity, respectively. With this

if the factor markets are competitive and firms choose inputs optimally. Here, KISit and LISit

The bias of technical change is given by g Bð Þ it=Ait , where gðÞ denotes a growth rate. If the bias is positive (negative), technical change is labor-biased (capital-biased) in the sense that it increases (decreases) the marginal product of labor (W) relative to that of capital (R) as

> Kit Lit �<sup>1</sup>

The expression of Eq. (2) is potentially consistent with observed trends: if capital and labor are gross complements, that is, σ<sup>i</sup> < 1 as most empirical evidence suggests, then the labor income share in sector i decreases as long as technical change in that sector is sufficiently capital-biased relative to the rate of capital accumulation, that is, g Bð Þ it=Ait < 0 < g Kð Þ it=Lit and the absolute

As Acemoglu [4] has noted, from about the 1980s, when the labor share started a decline, the capital-augmenting technical change has dominated the labor-augmenting technical change. Using this theory and empirical evidence, one could predict that the high growth rate of capital accumulation coupled with capital-augmenting technical improvement may contribute to a

Economic global integration, in terms of trade, finance, and international fragmentation of production, is widely viewed as a significant determinant of the evolution of labor shares. How is this global integration related to the abovementioned theoretical framework of the

The Heckscher-Ohlin model predicts that trade integration will lead labor-abundant developing economies to specialize in the production of labor-intensive goods, leading to a rise in the labor income share in developing countries and a decrease of the share in developed countries.

This model is at odds with the decline in labor shares of developing economies.

<sup>σ</sup><sup>i</sup> Bit Ait <sup>σ</sup>i�<sup>1</sup> σi

<sup>σ</sup><sup>i</sup> þ ð Þ 1 � α<sup>i</sup> ð Þ AitLit

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

Bit Ait Kit Lit <sup>σ</sup>i�<sup>1</sup> σi

<sup>σ</sup><sup>i</sup> <sup>σ</sup>i�<sup>1</sup>

σi�1 σi

http://dx.doi.org/10.5772/intechopen.81316

(1)

25

(2)

(3)

σi�1

production function, the ratio of the factor income shares in sector i is given by

represent the capital and labor income shares, respectively, in sector i at time t.

<sup>¼</sup> <sup>α</sup><sup>i</sup> 1 � α<sup>i</sup>

KISit LISit

R <sup>W</sup> <sup>¼</sup> <sup>α</sup><sup>i</sup> 1 � α<sup>i</sup>

value of g Bð Þ it=Ait is larger than that of g Kð Þ it=Lit .

downward trend of the worldwide labor income share.

i is produced using the production function

indicated from Eq. (3).

labor income share?

Yit ¼ αið Þ BitKit

The important point is that the amount of services input for nonservices production increases in developing countries where the nonservices production has started to be conducted by multinational enterprises (MNEs) from developed countries in GVCs. As a result, the services sector in developing countries actively accumulates capital to supply quality services to the nonservices sector effectively while the nonservices sector also promotes capital accumulation under severe international competition. The consequent macro-based capital deepening decreases labor income share in developing countries. In developed countries, on the other hand, many tasks of the nonservices sector with low elasticity of substitution between capital and labor are offshored to developing countries and the remaining nonservices sectors with relatively high elasticity of substitution accumulate capital at a rapid pace in an environment of low local relative cost of capital.

This mechanism of worldwide labor share changes can be analyzed by utilizing the data of sectoral labor income shares of developing and developed countries. Preceding studies have rarely used this kind of comprehensive dataset and rarely discussed intersectoral linkages between services and nonservices sectors as important determinants of the changes in macroeconomic labor income shares in developing countries.
