Aggregate Labor Share and Tax Havens: Things are not always what they seem

We study the impact of multinational enterprises' (MNEs) presence in tax havens on income inequalities between labor and capital by measuring its contribution to the dynamics of the aggregate labor share in France over 1997-2014. A difference-in-differences and a panel-event study are implemented to analyze the effect of firm entry in tax havens on firms' labor share and on each of its components. The average firm labor share experiences an increase by 2.6% over the immediate years following the establishment in a tax haven, given that domestic value added drops by 11.4%. This drop is due both to a real decline (60% of the effect) and to a mismeasurement (40% of the effect). The labor share increases despite an 8.8% decrease in its numerator, total wage bill, when MNEs enter a tax haven. Additionally, the total wage bill drop is explained by a decline in employment (-8.5%) rather than a decline in average firm wages, on which there is no effect. The mechanism at play is the "opacity effect" instead of the "tax effect" as the job cuts and tax haven entry nexus is not explained by an increase in capital intensity but rather by a restructuring decision triggering collective layoffs procedures, which are strongly regulated in France. We show that these developments are exclusively related to foreign investments in tax havens and not to other foreign investments. Given these firms’ weight in the economy, we find that the presence of MNEs in tax havens accounts for around 10% of the observed increase in the aggregate share of labor in France between 1997-2014.