How does financialisation affect functional income distribution? A theoretical clarification and empirical assessment

While it is frequently asserted that financialisation has contributed to the decline in the wage share there are only few econometric studies, which usually focus on a single aspect of financialisation. This paper provides a theoretical clarification and a systematic empirical investigation. We identify four arguments why financialisation would affect the wage share: (1) a political economy approach focusing on the exit options of firms, (2) a neo-Kaleckian approach stressing the role of financial overhead costs for firms, (3) increased competition on capital markets stressed by neo-Marxian approaches and the critical shareholder value literature, and (4) the role of household debt in increasing workers’ financial vulnerability and undermining their class consciousness. The paper compiles a comprehensive set of empirical measures of financialisation and uses it to test the theoretical hypotheses by a panel regression of 14 OECD countries over the 1989-2011 period. We find strong evidence for negative effects of household debt and evidence for negative effects of financial deregulation.