Determinants of functional income distribution (2011-12)

Professor Engelbert Stockhammer
Project for the International Labour Organisation (ILO)

The wage-led growth strategy aims at an economic regime where real wage growth leads to increased demand and technological progress and thereby provides the foundation for a sustainable growth process. But what determines wage growth or changes in income distribution in the first place? What have been the causes for the shift of income distribution at the expense of labour in advanced economies in the past three decades? How can wage growth be restored? These are the questions that motivate this project.
The last number of decades has witnessed profound changes in income distribution, with trends being somewhat clearer in advanced economies than in developing countries. There has been a pronounced rise in personal income distribution (OECD 2008); there has been a dramatic rise in top incomes relative to other incomes (in particular in Anglo-Saxon countries; Atkinson et al 2010); and there has been substantial decline in wage shares (in particular in continental Europe and Japan); distributional trends in developing economies are less well documented, but a polarization of income distribution has also taken place. These changes have given rise to a recent literature exploring the causes of these changes, which has highlighted technological change, globalisation, financialisation, and other institutional changes as potential causes. Recent research on the determinants of income distribution is driven by real-world developments rather than theoretical developments.

Research outline

The project aims at identifying the relative contributions of technological change, globalisation and financialisation in explaining changes in functional income distribution in the G20 countries econometrically. It will critically build on the existing literature, in particular on IMF (2007a), IMF (2007b), and EC (2007), and estimate a panel equation where the wage is explained by indicators of technology (e.g. ICT capital stock), globalisation (e.g. trade openness), financialization (e.g. the financial globalization as measure by the stock of foreign liabilities and assets; Lane and Milesi-Ferretti 2006). Given that some theories suggest that the factors will have opposite distributional effects in advanced (capital-rich) and poor (capital-poor) economies, particular attention will be paid to the issue of coefficient heterogeneity.
The project will provide further investigation on the determination of functional income distribution in developed economies, for which more data are available, building on Stockhammer (2009). Here the role of labour market institutions that have played a role in the discussion of unemployment; will be investigated. This is of interest as standard NAIRU models predict that those labour market institutions that affect long-term unemployment also affect the wage share (e.g. EC 2007).

Research output

  • Stockhammer (2013) investigates the relative impact of financialisation, globalisation, welfare state retrenchment and technological change on functional income distribution. By means of a panel analysis covering up to 71 countries from 1970 to 2007. He find strong negative effects of financialisation as well as negative effects of welfare state retrenchment and globalisation, but only a small contribution of technological change.
  • Stockhammer, E. (2013), Why have wage shares fallen? A panel analysis of the determinants of functional income distribution. ILO Working Paper, Conditions of Work and Employment Series No. 35


Photograph of a torn Euro banknote