Bargaining power and the labor share – a structural break approach
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Date
2021
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Abstract
In this paper we investigate the relevance of bargaining institutions in the decline in
labor share. Several explanations for the decline exist, which consider the relevance
of technology, globalization and markups. Surprisingly neglected so far, however, is
the influence of bargaining institutions, in particular with a focus on changes in the
outside option. We provide evidence of this issue, using the Hartz IV labor market
reform in Germany as an exogenous shock in the wage bargaining of employees,
and investigate its impact on the labor share. We begin by developing a theoretical
model in which we outline the effect of a decrease in the outside option within a
wage bargaining framework. Thereafter, the approach is twofold. Combining the
EU KLEMS and Penn World Table databases, we first endogenously identify the
Hartz IV reform as a significant structural break in the German labor share. Second,
we estimate the effect of the Hartz IV legislation on the aggregated labor share
using a synthetic control approach in which we construct a counterfactual Germany
doppelganger. Finally, we use rich firm-level panel data compiled by Bureau van
Dijk to support our results on the aggregated labor share. We find that the reform
decreases the labor share by 1.6 - 2.7 percentage points depending on method and
aggregation level. The synthetic control approach furthermore provides evidence
that this effect is persistent over time since the reform.
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Keywords
labor share, GMM, synthetic control method, inequality, change-point tests, Hartz reform