Promotions-Projekt: Financialization and Income Distribution - Empirical Evidence from OECD Countries

Ph.D. Project – Financialization and Income Distribution - Empirical Evidence from OECD Countries, Petra Dünhaupt, Carl von Ossietzky University, Oldenburg and Macroeconomic Policy Institute (IMK), Düsseldorf.

Supervisors: Prof. Dr. Eckhard Hein, HWR Berlin; Prof. Dr. Hans-Michael Trautwein, Carl von Ossietzky Universität Oldenburg


Since the 1980s, inequality is on the rise in most OECD countries, which becomes apparent by the secular decline of labor’s share in national income, increases in personal income inequality measured by Gini coefficients, and also by the prevalence of high-income concentration of the top income share. The present dissertation project elaborates on the determinants of income distribution against the backdrop of financialization. In the international sphere and in academia, the term is often used to denote distinct phenomena such as the shift from the real to the financial sector of an economy, the deregulation and liberalization of goods and capital markets, the shareholder value doctrine or the rise in household indebtedness. More recently, the term financialization has been used to describe the increasing magnitude and interrelation of financial activities among sectors. The main research question can be divided into two parts: first, can the decline in labor’s share of income in OECD countries be partly attributed to the relatively recent increase in financialization? And second, is financialization also a contributing factor to rising personal income inequality? The hypothesis that will be tested in this work states that the redistribution of income largely reflects the shifts in power relations imposed by the interaction of neoliberalism and financialization, between labor and capital on the one hand, and between managers, shareholders and workers on the other hand.

A first article Financialization and the rentier income share - evidence from the USA and Germany seeks to determine who gained from the fall in the labor share of income in the USA and Germany, respectively. If financialization is indeed responsible for the decline, rentiers should be the beneficiaries. In order to identify the relevant effects, the profit share of the two countries under observation is split up between the share of retained earnings and the share of net property income (= rentiers’ income). The presented evidence shows that the development of the rentier income share indeed corresponds quite well with the stages of development of financialization in the two different countries: In the US, where the important shift towards financialization occurred in the early 1980s, the rentiers’ share of income shows a corresponding leap upwards exactly at that time and remains on a higher level until the end of the observation period. In Germany, the process of financialization started much later – in the beginning of the 1990s - and followed a much more gradual transition which is perfectly mirrored by the development of income shares: From the 1990s onwards the rentiers' income share gradually increases over time.

The second article Determinants of labour’s income share in the era of financialisation seeks to explore the relationship between financialisation and labour’s share of income using a time-series cross-sectional dataset of 13 countries over the time period from 1986 until 2007. The role of globalization, shareholder value orientation and government activity as potential channels of influence on labor’s share of income are tested against the backdrop of the Kaleckian theory of income distribution. The results suggest that financialization impacts labor’s share in national income via the following channels: Above all, workers’ bargaining power is curbed by an increase in shareholder value orientation and a short-term horizon of the management, combined with globalization and the liberalization of international trade and finance. Moreover, an increase in overhead obligations in the form of rising interest and dividend payments was passed on to wages, resulting in a rising mark-up and causing the share of labor’s income to decline. Further, the decline in government activity shifted the sectoral composition of the economy, as did the shift towards the financial sector, both contributing to the decline in the overall share of labor income.

A third article An empirical assessment of the contribution of financialization and corporate governance to the rise in income inequality elaborates on the determinants of personal income inequality and the potential contribution of financialization for a sample of 13 OECD countries between 1980 and 2010. The empirical analysis tests for two variables that relate to changes in corporate governance and includes variables that relate to power resources and the welfare state and further variables measuring structural changes related to globalization, economic development, technological change, female participation rate and the dependency ratio. The results suggest that a rise in shareholder value orientation measured by stock market capitalization and dividend payments of non-financial corporations, the unemployment rate, technological change and the old age dependency ratio, contribute to the increase in inequality, while union density, trade openness, economic growth and social spending are associated with a decline in inequality. In regard to the top income share, the results suggest that stock market capitalization and dividend payments contributed to the rise in top shares, whereas union density, trade openness, economic growth and top marginal tax rates compress top shares.

Related Publications

  • Dünhaupt, P. (2012): Financialization and the Rentier Income Share – Evidence from the USA and Germany, in: International Review of Applied Economics, 26(4): 465-87.
  • Dünhaupt, P. (2017): Determinants of Labour’s Income Share in the Era of Financialisation, in: Cambridge Journal of Economics, 41(1): 283-306.
  • Dünhaupt, P. (2014): An Empirical Assessment of the Contribution of Corporate Governance and Financialization to the Rise in Income Inequality, IPE Working Paper 41/2014.