Factor Shares in Finnish Industry Over the 20th Century : Descriptive Evidence

Within the last forty years, capital has increased its share of national income at the expense of labour across developed and developing economies, with few exceptions. The trajectory has been successfully linked to technological change, globalisation and the erosion of the bargaining power of employees in theoretical and empirical examinations. Due to short time series, it has remained unclear whether the increase in capital share is a consequence of modern trends, such as hyperglobalisation or the ICT-boom. Recognizing the mechanisms behind the increase is worthwhile from the social planner’s viewpoint, because of factor shares’ connection with personal income inequality and unemployment, both triggers of social unrest. This thesis examines the connection between labour income share and its potential determinants in Finnish industry, namely technological change, globalisation, union power, devaluations, capital mobility and public expenditure between 1907 and 2015. The main empirical strategy used was the fixed effects regression, where the first three aforementioned determinants were proxied with capital intensity, total factor productivity (TFP), import and export exposure, union density and the number of strike days per worker, while controlling for branch fixed effects, common national trends and branch-specific trends. The last three country-level determinants were studied using time series analysis. The primary data source was Bank of Finland’s Growth studies, which was complemented with the data in various volumes of the Official Statistics of Finland, in addition to selected separate publications. According to the results, technological change has a negative effect on labour share, while union power and import exposure have a positive impact. Periodizing, the increase in capital intensity can more than explain the decrease in labour share from 1907 to 1943. Between 1943 and 1991 the quadrupling of union density accounts around a third of the 28.2 percentage point increase in labour share. From 1991 to 2007, the acceleration of TFP growth rate can predict around 60% of the 23.7 percentage point decline in labour share. The findings suggest, that technology is the key driver of functional income distribution also in the long-term, which complements its importance in the recent increase in capital shares, covered in previous research. Moreover, in the early 20th century technology appears to have worked more as a substitute for labour, while after mid-century it has become rather complementary and efficiency-improving. In addition, the ICT era has brought along an increase in market concentration, implying that technology operates also potentially through rising economic rents. Union power had a non-trivial role in inflating labour share during the post-WWII decades. Finally, import exposure has increased labour share presumably by squeezing profits, but its significance is overshadowed by the other covariates