Financialization, labor market institutions and inequality

Abstract

The last three decades have witnessed rising inequality and deepening financialization in post-industrial democracies. A rapidly growing literature has linked these two phenomena. We go beyond existing scholarship by specifying which aspects of financialization can be expected to increase inequality and where in the income distribution this effect will occur. We also show that this effect is contingent on institutional context. We posit that the shareholder model of corporate governance and the growing demand for financial professionals are the two dimensions of financialization that drive up pre-tax income inequality. Nevertheless, the spread of the shareholder value model only benefits the very top income earners. We further argue that the institutional strength of labor shapes the relationship between financialization and inequality. We analyze effects of indicators of these two dimensions of financialization on the top 1% and the next 9% income shares and on the 90:50 earnings ratio. We test our hypotheses with data on 18 post-industrial democracies between 1960 and 2015.

Keywords:

• Political economy
• financialization
• income distribution
• labor market institutions
• shareholder value model
• post-industrial societies

Acknowledgement

The authors would like to thank Dorothee Bohle, Roland Erne, Julian Garritzmann and Frank Nullmeier for comments and suggestions

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Bureau of Economic Analysis, Table 3.1 US Trade in Services, available at http://www.bea.gov/iTable/iTable.cfm?ReqID=62&step=1#reqid=62&step=2&isuri=1&6210=1 (accessed 9 December 2016).

2 Or the transformation of financial assets, especially loans, into tradable securities.

3 Denk (2015, p. 19) defines the financial wage premium as ‘the percentage by which gross annual earnings of weighted full-time full-year equivalent employees in finance exceed those in other sectors’.

4 Individuals are used as the unit of analysis for some years in the series for Canada, Denmark and United Kingdom.

5 To address missing values, Roine et al. (2009) interpolate the values for 1961–1969 and 1971–1974. One might object to this since the stock market fluctuates considerably from year to year. We ran the models with and without the interpolated observations. Our results remained substantially the same. Therefore, we have retained the interpolated data in order not to lose observations with data for the other independent variables.

6 The existence of 3256 currently registered European Corporations, which are not subject to the labor laws of any particular country, might raise concern. Nevertheless, most of these corporations are subsidiaries, and the status of workers in corporate governance is the result of negotiations at the founding of the European Corporation. While insufficient data do not permit a comprehensive analysis, it seems common for companies to maintain the works council rights of the headquarter country. Such is the case, for instance, of Airbus and Porsche. At most, inconsistencies between national laws and company practice would be noise in our data and weaken the observed relationships (https://www.etui.org/Services/European-Company-SE-Database).

7 The combination of panel corrected standard errors and ar1 corrections is known as Prais Winsten estimations.

8 A Granger causality test allows one to test whether the past values of one variable are useful for predicting another variable given the past values of the latter (Granger, 1969). The test is carried out by regressing y on its own lagged values and on lagged values of x. The null hypothesis – that the estimated coefficients on the lagged values of x are jointly zero – is rejected when x Granger-causes, or effectively forecasts, y.

Additional information

Notes on contributors

Evelyne Huber

Evelyne Huber is Morehead Alumni Distinguished Professor of Political Science at the University of North Carolina, Chapel Hill. She studies democratization and redistribution in Latin America and advanced industrial democracies. She is the author and co-author of several books, three of which have won book awards.

Bilyana Petrova

Bilyana Petrova is a Postdoctoral Fellow at the Stone Center for the Study of Social and Economic Inequality at the Graduate Center of the City University of New York. She studies the political economy of reform, quality of governance and income distribution in Eastern Europe and Latin America.

John D. Stephens

John D. Stephens is Lenski Distinguished Professor of Political Science and Sociology and Director, Center for European Studies, University of North Carolina, Chapel Hill. He is the author or co-author of five books including the award-winning Capitalist Development and Democracy (with Evelyne Huber and Dietrich Rueschemeyer, 1992), Development and Crisis of the Welfare State (2001) and Democracy and the Left (2012, both with Evelyne Huber).