Integrated capital shares

ABSTRACT

In empirical macroeconomics, inter-dependencies between countries are often analysed using cross-country correlations or graphical investigation of time series. This study shows that applying an alternative methodological approach – identification of common unobservable factors and using them as explanatory variables for country-specific time series – indicates a stronger cross-country integration of functional income distributions than the standard methods. The results vary only little between different samples, where both the country and year coverage change. Moreover, the main findings are not sensitive to the way capital depreciation is taken into account. The primary driving factor seems to be the same irrespective of the set of countries and time period. Furthermore, in the majority of the countries, this factor is strongly correlated with both trade openness and total factor productivity, which have been suggested to be key drivers behind the changes in the division of income between capital and labour.

KEYWORDS:

• Functional income distribution
• cross-country integration
• principal component analysis

JEL CLASSIFICATION:

• F15
• F21Correct

Acknowledgments

I greatly benefited from the help of Vance Martin on the methodological approach and the valuable comments by Juha Junttila.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ This line of thinking is at the core of the analysis by Piketty (2015)..

² See, e.g., Gollin (2002) and (Elsby, Hobijn, and Şahin 2013) decline for a detailed discussion..

³ As a specific challenge, factors such as taxation incentives may bring about volatility, non-fundamental to the distinction between gross and net capital shares, in the rates of capital depreciation.

⁴ Depreciation may be driven by factors common across countries, especially technological development but also national accounting practices. Integration may thus arise simply as a function of common trends in depreciation. This comment by an anonymous referee is gratefully acknowledged.

⁵ The data used in this study are freely available at http://www.uueconomics.se/danielw/Data.htm under “Capital shares and income inequality: Evidence from the long run”, WP, (with Erik Bengtsson) 2015.

⁶ The correlation matrices, principal component analyses and detailed regression outputs for all samples can be reproduced using the supplementary materials..

Additional information

Funding

This work was supported by the Finnish Cultural Foundation, South Savo Regional Fund under [Grant 12181963].