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Financial Development and Instability: the Role of the Labour Share

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  • ORGIAZZI, Elsa

Abstract

This paper examines the role of the labour share in creating instability in a small open economy. We assume that financial markets are imperfect so that entrepreneurs are credit constrained, and that this constraint is tighter for low levels of financial development. Aghion, Bacchetta and Banerjee (2004) have shown that as the degree of financial development increases, output rises but instability appears for intermediate levels of financial development. Crucially, they assume that labour is paid before production takes place, and hence crises are solely due to the increased cost of debt repayment as firms accumulate capital. We show that under the more reasonable assumption that wages are paid at the end of the period, changes in the labour share also play a role in eroding profitability. Our analysis also predicts that financial crises are associated with substantial movements in the sharing of value added between capital and labour.

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  • ORGIAZZI, Elsa, 2007. "Financial Development and Instability: the Role of the Labour Share," MPRA Paper 6304, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:6304
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    1. Bertola, Giuseppe, 1993. "Factor Shares and Savings in Endogenous Growth," American Economic Review, American Economic Association, vol. 83(5), pages 1184-1198, December.
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    Cited by:

    1. Huong Le, 2020. "The Impact of Financial Integration on the Labor Share of Income: An Empirical Evidence from a Panel Dataset," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 63(3), pages 597-627, September.
    2. Hashimoto, Ken-ichi & Im, Ryonghun & Kunieda, Takuma & Shibata, Akihisa, 2022. "Financial destabilization," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    3. repec:agr:journl:v:9(586):y:2013:i:9(586):p:145-167 is not listed on IDEAS
    4. Chiu, Yi-Bin & Lee, Chien-Chiang, 2020. "Effects of financial development on energy consumption: The role of country risks," Energy Economics, Elsevier, vol. 90(C).
    5. DiMaria, charles-henri, 2023. "Profitability, investment and capital productivity," MPRA Paper 118640, University Library of Munich, Germany.
    6. Nguyen, Canh Phuc & Su, Thanh Dinh, 2021. "Easing economic vulnerability: Multidimensional evidence of financial development," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 237-252.

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    More about this item

    Keywords

    Financial liberalization; Volatility; Labour share; Credit constraint;
    All these keywords.

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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