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Privatization, Entry Regulation and the Decline of Labor's Share of GDP: A Cross-Country Analysis of the Network Industries

Ghazala  Azmat,  Alan  Manning,  John  Van Reenen,  June 2007
Paper No' CEPDP0806: | Full paper (pdf)
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Keywords: Profit share; Wages, Privatization, Entry Regulation

JEL Classification: E25; E22; E24; L32; L33; J30

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This Paper is published under the following series: CEP Discussion Papers
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Abstract:

Labor’s share of GDP in most OECD countries has declined over the last two decades. Some authors have suggested that these changes are linked to deregulation of product and labor markets. To examine this we focus on a large quasi-experiment in the OECD: the privatization of many network industries (e.g. telecommunications and utilities). We present a model with agency problems, imperfect product market competition and worker bargaining which makes clear predictions on how the labor share, employment and wages respond to privatization and other regulatory changes. We exploit cross-country panel data on several network industries and find that privatization can account for a significant proportion of the fall of labor’s share (a fifth overall, but over half in Britain and France). The impact of privatization has been offset by falling barriers to entry, which consistent with theory, dampens profit margins.