DERECHO ALIMENTARIO DE LOS DESCENDIENTES

Th e above analysis shows that the labour share of income has tended to decline, though with signifi cant cross-country diff erences in the direction and size of these trends. Th e question arises regarding what specifi c impact such trends have had on growth and development. Th is section examines this issue, based on diff erent methodologies which make it possible to identify specifi c impacts of changes in labour share of incomes on consumption, investment and competitiveness chan- nels (box 8.3).

A rebalancing of functional income distribution may boost growth and jobs

The labour share of income multiplier measures the percentage increase in output following a 1 per cent increase in the labour share of income. Figure 8.10, panel A shows the implicit labour share of income multiplier for three income groups – EEs, LMIs and LDCs (see Appendix C for technical details). Estima- tions show that the multiplier is above 1 in EEs and signifi cantly smaller than 1 in LMIs and LDCs. Th e lower multipliers in LMIs and LDCs may be explained by the degree of duality in the economy that makes wage policies less eff ective in poorer countries. Th e eff ect is strong and sustained over time as the multiplier is still positive aft er fi ve years. Th is is explained by the nature of the experiment illus- trated in this section: a permanent increase in the labour share of income.

Th ese multipliers are derived from the Global Policy Model (see Cripps 2013), which encompasses 15 individual developing countries and 12 country groups. Th e value added of such a model is that it integrates countries within a unifi ed frame- work and tracks international spillovers between countries.11

Th e estimation is based on a panel of annual data, starting in 1980, and diff er- entiates between the consumption eff ect, the investment eff ect and the net export eff ect associated with an increase in the labour share of income.12 Figure 8.10, panel B presents the reaction of consumption, investment and net export to a change in the labour share. The direction of the three effects follows the the- oretical literature, as consumption increases, as labour income sustains consumer spending decisions, while both investment and net exports are crowded out by lower profi t share. By contrast, fi rms base new investment decisions on their profi t- ability, which is adversely aff ected by lower mark-up. Th e deterioration in the trade balance may be associated with the high consumption of households in a glo- balized world. Th e loss of competitiveness depends on the transmission between lower mark-up and price infl ation. Overall, the positive consumption eff ect out- weighs the negative investment and net export eff ects and leads to an increase in growth in the three regions.

11. Figure 8.9 displays an implicit labour income multiplier as the experiment undertaken in this simulation is a reduction in the mark-up of fi rms. Directly increasing nominal labour income might be misleading, as this translates into higher infl ation.

12. Th e policy experiment is a reduction in the mark-up of fi rms, which is equivalent to an increase in the labour share of income.

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Box 8.3 Aggregate demand and output effects of changes in the functional distribution of income in high-income countries

In high-income countries, analysis of the relationship between income distribution and aggregate demand highlights three effects: consumption, investment and trade (or com- petitiveness) effects. For instance, in the case of a fall in the labour share of income, con- sumption may be negatively affected. By contrast, falling labour incomes mean higher profits, which, other things being equal, may stimulate investment. The relative strength of these two effects determines the type of demand regimes in a closed economy frame- work. When the propensity to consume out of labour income is higher than the pro- pensity to invest out of profits, the demand regime is termed “labour income-led”. This means that the net effect of a fall in the labour share is a reduction in aggregate demand. The labour income-led regime is illustrated by the solid red line in Figure|8.9. In the oppo-

site case, the demand regime is “profit-led”: a fall in the labour share boosts aggregate demand (solid blue line in Figure|8.9).

In an open economy, a competitiveness effect should also be taken into account. This arises because a lower labour share of income is associated with a reduction in unit labour costs, resulting in improved cost competitiveness and possibly higher net exports. The demand regime is said to be “export-led” when the competitiveness dominates the consumption effect. In Figure|8.9, the dash-dotted purple line shows that, on impact, economic activities decline due to the consumption effect. However, output becomes positive after two quarters following the increase in net exports.

Following a decline in labour costs in the home country, the question arises of whether the competitiveness effect has a detrimental impact on trading partners. In such a case, lower labour cost in the home country has a beggar-thy-neighbour effect on trading partners. The output reaction in the foreign economy following a decline in the labour share in the home country is illustrated by the light blue dotted line. Figure|8.9 shows

that the foreign economy is negatively impacted by the loss of competitiveness relative to the home country.

–0.4 0

–0.8 0.4

Figure 8.9 Impacts of a declining labour share of income on output

O utp ut ch an ge , i n p er ce nt ag e p oi nt 0 1 2 3 4 5 2TQƂVNGF 9CIGNGF Home Foreign 0QVG6JKUƂIWTGFKURNC[UVJGFGXKCVKQPQHQWVRWVKPRGTEGPVCIGRQKPVFGXKCVKQPHTQO UVGCF[UVCVGHQNNQYKPICFGENKPGKPVJGNCDQWTUJCTGQHKPEQOGD[RGTEGPVCIG RQKPVU0WOGTKECNUKOWNCVKQPUCTGRGTHQTOGFDCUGFQPCVYQEQWPVT[&5)'OQFGN 5QWTEG%JCTRGCPF-ØJP

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Single country estimation shows that demand regime

is mainly labour income-led for Ƃ ve Latin American countries

with sufƂ cient time series available

Table  8.1 shows the outcome of estimation of demand regime for five Latin American countries: Columbia, Honduras, Mexico, Panama and Venezuela. These five countries were selected, as the Economic Commission for Latin America (CEPAL) produces long time series of the labour share of income that allow for single countries estimations. One shortcoming of the panel data estima- tion presented above is that demand regimes are estimated for each pool of coun- tries, which conceals individual country eff ects. Data availability starts in 1970 in Columbia, Mexico and Venezuela, in 1960 in Panama and in 1950 in Honduras. Th e labour share is defi ned using the compensation of employees and therefore ignores self-employment incomes.

Th e estimation strategy is to rely on a reduced form equation for the level of economic activity. One strand of the literature relies on the estimation of diff erent elements of aggregate demand – a consumption function, an investment function and a net export function – to identify the demand regime. Despite the advan- tages of this approach, it does have certain shortcomings, one of which is the dif- fi culty of comparing parameters across equations. A second shortcoming is that each component of aggregate demand is estimated in isolation.

0.4 0.8 1.2 Im pl ic it la bo ur s ha re mu lti pl ie r 0

1.6 Panel A. Output multiplier 2015–2020 (%)

0 30 Im pl ic it mu lti pl ie rs w ei gh te d b y th e c on tri bu ti on of e ach c omp on en t i nto a gg re ga te d em an d –30

60 Panel B. Consumption, investment and trade balance in 2015 (%)

0QVGVJKUƂIWTGFKURNC[VJGKPETGCUGKP)&2KPRGTEGPVCIGUCUUQEKCVGFYKVJCRGTEGPVKPETGCUG KPVJGNCDQWTUJCTGQHKPEQOG 5QWTEG)NQDCN2QNKE[/QFGN%TKRRU 0QVG6JKUƂIWTGFKURNC[UVJGKPETGCUGKPVJG URGEKƂECIITGICVGFGOCPFEQORQPGPVVQ)&2 TCVKQKPRGTEGPVCIGUDGVYGGPVJGDCUGNKPGCPF VJGTGFWEGFOCTMWRUEGPCTKQCUUQEKCVGFYKVJC RGTEGPVKPETGCUGKPVJGNCDQWTUJCTG'CEJ OWNVKRNKGTKUYGKIJVGFD[VJGEQPVTKDWVKQPQH GCEJEQORQPGPVVQCIITGICVGFGOCPF 5QWTEG)NQDCN2QNKE[/QFGN%TKRRU

Figure 8.10 Simulated impact of higher labour share of incomes in 2015

2015 2016 2017 2018 2019 2020

EEs LMIs LDCs

''U ./+U .&%U

Consumption/GDP Investment/GDP Net export/GDP

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Using our specifi cation, the dependent variable and the explanatory varia- bles are tested for unit root using the Augmented Dickey Fuller test. As the test shows non-stationarity, the estimations are performed using fi rst diff erence (see Appendix D for a description of the methodology).

Th e dependent variable is the diff erence in the log of GDP per capita. Th ere are three explanatory variables, all expressed in the diff erence of the log. Th e lagged GDP per capita captures the auto-correlation in the data for GDP per capita. Th e lagged labour share captures the demand regime in each country. Th e advantage of the reduced form approach is that the sign of the coeffi cient for the labour share indicates directly the type of demand regime. When the parameter is positive, the demand regime is labour income-led. Th e opposite sign indicates a profi t-led demand regime. Finally, the real exchange rate captures the openness of the dif- ferent economies considered. Additional explanatory variables could not be incor- porated due to missing information. One key missing variable is the real interest rate, as this captures the impact of fi nancial conditions in the rate of capital accu- mulation. Another key variable is the regional GDP per capita, as it would capture the dynamic of trading partners.

Table 8.1 presents the results of the GDP per capita equation for each of the fi ve countries. Th e sign in front of the labour share of income variable is signifi cant and positive in two out of four countries. Th e demand regime in Honduras cannot be interpreted from this exercise as the sign is not signifi cantly diff erent from zero. This indicates that the demand regime is labour income-led in Colombia and Panama. Additionally, the estimation displays important autocorrelation in the GDP per capita, which is to be expected. Finally, the sign for the real exchange rate is positive. A depreciation of the real exchange rate improves the competi- tiveness of the country and has a positive impact on economic activities. Th e esti- mator used is a weighted least square. Th e choice of the estimator is motivated as the error term is heteroskedastic in the case of the OLS estimator. Th e advantage of the weighted least square is to improve the t-stat, that are not robust in the case of an OLS estimator.

Table|8.1 Demand regime estimation: Single country estimation | Dependent variable: d log(yt)

Colombia Honduras Mexico Panama Venezuela

d log(yt–1) 0.96*** 0.37** 0.45*** 0.58*** 0.58***

d log(wst–1) 0.29*** 0.09 –0.30*** 0.05*** –0.11***

d log(rert–1) 0.20*** 0.02 –0.07*** –0.59*** 0.06***

Nber Obs 39 49 40 49 39

Demand regime Labour income-led Undetermined Profit-led Labour income-led Profit-led

Note: This table|displays the result of the GDP per capita reduced form equation: y = the GDP per capita, ws = the labour share of|income, rer = the real exchange rate and Nber Obs = the number of observation. Variables are expressed in difference of the log (d log) to deal with unit root. Tests for autocorrelation and heteroscedasticity in the error term have been performed on the OLS estimator. As a result of these tests, we use weighted least square. The asterisks indicate significance at *** 10|per cent, ** 5|per cent and * 1|per cent.

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