Rent‐Sharing and Workers' Bargaining Power: An Empirical Cross‐Country/ Cross‐Industry Panel Analysis

• Published date: 01 April 2018
• Date: 01 April 2018
• DOI: http://doi.org/10.1111/sjoe.12228

©The editors of The Scandinavian Journal of Economics 2017.

Scand. J. of Economics 120(2), 563–596, 2018

DOI: 10.1111/sjoe.12228

Rent-Sharing and Workers’ Bargaining

Power:An Empirical Cross-Country/

Cross-Industry Panel Analysis*

Philippe Askenazy1

French National Centre for Scientific Research (CNRS), Paris School of Economics,

FR-75014 Paris, France

philippe.askenazy@ens.fr

Gilbert Cette2

Banque de France, FR-75001 Paris, France

gilbert.cette@banque-france.fr

Paul Maarek3

Universit´e de Cergy-Pontoise (THEMA), FR-95000 Cergy-Pontoise, France

paul.maarek@u-cergy.fr

Abstract

In this paper, we study how rents are shared between capital and labour, using industry-

level panel data for 19 OECD countries from 1988 through to 2007. The first step is

an explanation of the rent-creation process. We provide evidence of a significant impact

of regulation on value-added prices at the industry level relative to the value-added

price for the overall economy (rent). In the second step, we dissect the value-added

sharing process. By running ordinary least-squares and instrumental variables estimations,

we obtain results that confirm the Blanchard–Giavazzi prediction: the impact of rents

on the capital share depends on workers’ bargaining power.

Keywords: Capital share; market regulations; output gap; prices; rents; unemployment

JEL classification:E25; J20

I. Introduction

In the past two decades, considerable economic literature has been devoted

to the determinants of the distribution of value added between capital and

labour. These factors are important for the analysis of the dynamics of

inequality and of growth. Creation and appropriation of rents are among

*The authors would like to thank seminar participants at the Banque de France, especially

David Spector, and the anonymous referees for their stimulating remarks and suggestions.

1Also Centre Maurice Halbwachs-PSL, and Professor at the Ecole Normale Sup´erieure.

2Also associated with Aix-Marseille University, CNRS, and EHESS.

3Also affiliated with Banque de France.

564 Rent-sharing and workers’ bargaining power

the principal motivations for both physical and intangible investment, such

as R&D and technical know-how (for a survey, see Aghion and Howitt,

2009); rents also determine the overall level of wages across industries

and countries.

By means of panel estimates that exploit Organisation for Economic Co-

operation and Development (OECD) country-cross/cross-industry data, our

empirical analysis seeks to clarify some of these mechanisms, including

product market regulations, that determine rent creation and the distribution

of valued added. Our estimations directly test a specific prediction of the

models of Blanchard and Giavazzi (2003) and Spector (2004) that concerns

the sharing of rents. We propose a simple theoretical model that replicates

frequently used modelling: rents or price margins stem from an oligopoly;

and the value-added sharing process between labour and capital depends

crucially on the interactions between the size of price margins and the

bargaining power of labour. In this context, the share of capital in value

added declines as the bargaining power of labour rises – although this

effect tapers off as price mark-ups decrease (except if competition is too

limited, that is, the number of firms in the oligopoly is small).

Our dataset is a combination of data on 18 industries in 19 OECD

countries during the 1988–2007 period, drawn from the OECD STructural

ANalysis (STAN) database and the OECD unemployment statistics and

regulation indicators. After accounting for missing data and eliminating

spurious observations, we exploited a large dataset containing 4,570

observations.

The empirical analysis is performed in two main steps. The first is an

explanation of the rent-creation process. Our approach to measuring the

amount of rents is original in that we use the value-added price at the

industry level relative to the value-added price for the overall economy

(relative price), as provided by national accounts for each country-industry

per year. This enables us to measure rents before the sharing process,

which we study separately afterwards. This corresponds to the ability of

firms in a given industry to charge higher prices for a given value added

relative to prices in other industries. The latter corresponds to the definition

of rents in Blanchard and Giavazzi (2003). If all industries in the economy

increase prices by the same proportion, this does not constitute additional

resources in real terms per unit of value added. The relative price variable

is thus an appealing measure of rents, and it says nothing about how these

additional resources (rents) are shared. In the relation estimated, relative

prices are assumed to depend on anticompetitive regulations in goods and

services markets. We then test several anticompetitive indicators: import

taxes, restrictions on foreign direct investment (FDI), and barriers to entry.

Consistent with the theoretical framework, our results confirm that the

impact of these regulations on prices at the industry level is significant.

©The editors of The Scandinavian Journal of Economics 2017.

P. Askenazy, G. Cette, and P. Maarek 565

In the second step, we analyse the central mechanism: how value

added is allocated between labour and capital. Labour’s bargaining power

is measured by the unemployment rate of male workers aged 25–54.

Labour market conditions (the unemployment rate) are a good candidate

to measure variation in workers’ bargaining power. There are many other

factors that directly affect workers’ bargaining power, such as

unemployment benefits or labour market regulations. However, this variable

does not vary at all in most of the countries considered and should

to a large extent be captured by fixed effects. The unemployment rate

exhibits sizeable fluctuations for given labour market institutions. Hence,

the unemployment rate seems well suited to capture variations in workers’

bargaining power. By running ordinary least-squares (OLS) and

instrumental variables (IV) estimations, as well as various robustness

checks, we obtain results that confirm a key prediction of Blanchard and

Giavazzi (2003): interactions of our measure of bargaining power and

relative prices have a clear impact on the capital share of value added.

The higher the unemployment rate, the lower the bargaining power of

workers and the greater the impact of rents on capital’s share of value

added, because the greater proportion of rents translates into profit. From

our estimate results, a 1 percentage point change in the unemployment

rate of men aged 25–54 is, on average, associated with a 0.22 percentage

point change in the same direction in the capital share.

We associate these findings with results relating to specific countries

or industries. In their theoretical and empirical cross-country analysis of

a number of network industries (e.g., telecoms and utilities), Azmat et al.

(2012) study the impact of product market regulations on labour’s share

of value added. They use two indicators to measure goods and services

regulation: public ownership and barriers to entry. They show that labour’s

share grows when public ownership increases, and it falls as barriers

to entry shrink. The public ownership indicator in fact captures labour’s

bargaining power. Young and Zuleta (2015) illustrate the advantage of using

panel industry-level data in the case of the US. They show that union

density (membership or coverage rates) is correlated with labour’s share,

and this correlation appears to be decreasing in the elasticity of substitution

between labour and capital. Using a linked employer–employee dataset for

Germany, Guertzgen (2009) studies the impact of firm profitability (rents)

on wages. He shows that this impact depends on the presence and the type

of wage agreements (firm- or industry-specific). The literature supports the

view that product market regulations appear to have a positive impact on

rent creation and real wages, but it is more ambiguous with respect to the

value-added sharing process between labour and capital. However, labour

market regulations have no significant impact on rent creation, but they

do have a positive impact on real wages and labour’s share. More broadly,

©The editors of The Scandinavian Journal of Economics 2017.