Factor income shares and micro-level restructuring: An analysis of Finnish manufacturing

This paper examines the relationship between productivity-enhancing restructuring at the micro level and changes in aggregate factor income shares in Finnish manufacturing. As a framework we make use of a simple model where long-run aggregate productivity growth is determined by successive technology steps that are taken in the new plants by seizing new technological opportunities. This requires investments into tangible and intangible capital that involve sunk costs. Wages are determined through centralised bargaining. In the equilibrium wages are set so that the present value of profits of the plants are squeezed to zero. Identical workers share the same wage level and the wages are increased at the rate of previous aggregate productivity growth, so that in the steady state factor income shares are unchanged. According to the model, the larger the new technological opportunities, the higher is the R&D intensity and the higher is the restructuring component of aggregate productivity growth and the larger is the income share of capital. We find evidence that the decline in the aggregate labour share can be very much explained by the transfer of payroll shares from high labour income share (poorly profit-making) plants to low labour income share (profitable) plants. Empirical findings about the micro-level sources of aggregate productivity growth and the micro-level features of the changes in aggregate income shares are consistent with the interpretation that Finnish manufacturing experienced a positive technology shock in the latter part of the 80s. Some signs of the chilling of restructuring can be found in the late 90s.