DP6348 Privatization, Entry Regulation and the Decline of Labour's Share of GDP: A Cross-Country Analysis of the Network Industries

Author(s): Ghazala Azmat , Alan Manning , John Van Reenen

Publication Date: June 2007

Keyword(s): Entry Regulation , Labour share , Privatization , Wages

JEL(s): E22 , E24 , E25 , J30 , L32 , L33

Programme Areas: Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP6348.asp.asp

Labour'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 labour 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 labour 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 labour'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.