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The drivers of labour share and impact on pay inequality: A firm-level investigation

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Abstract

Income inequality and labour share have followed divergent trends in Australia. Empirical studies have attempted to explain their movement and their relationship using macro data. However, what is lacking is a firm-level study to capture the determinants of labour share specific to the firm’s production technology and market structures with an investigation into the impact on pay inequality inside firms. Hence, we conduct the first Australian firm-level study using a sample of Australian listed firms over the period 2004-2019. First, we examine the impact of technological progress, product market power and labour market power on the labour share. The results show that the decline in Australian labour share is mainly driven by technological progress and increasing product market power. However, labour market power does not have a significant impact on labour share. These findings are robust to an array of sensitivity tests. Second, we examine the impact of labour share on pay inequality within firms. We find robust evidence that declining labour share is a significant driving force in the evolution of pay inequality. Moreover, a 10 per cent decline in labour share rises pay inequality by 4.19 per cent. Additional tests show that technological progress and product market power can moderate the negative impact of labour share on pay inequality.

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  • Roya Taherifar & Mark J. Holmes & Gazi M. Hassan, 2023. "The drivers of labour share and impact on pay inequality: A firm-level investigation," Working Papers in Economics 23/03, University of Waikato.
    • Handle: RePEc:wai:econwp:23/03
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    Keywords

    Income Distribution; Mark-up; Labour Share; Pay Inequality; Total Factor Productivity;
    All these keywords.

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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