Capitalism and Labor Shares: A Cross-Country Panel Study, 1970 to 2010

We examine the empirical relationship between the institutions of economic freedom and labor shares in a panel of 90 countries covering 1970 through 2005. We find that a sample standard deviation increase in the Fraser Institute’s Economic Freedom of the World (EFW) score is associated with a 15 percent increase in labor share. Starting from the sample mean labor share in our panel, this amounts to about 6.5 percentage points. A positive relationship between EFW and labor share is robust to considering, separately, OECD and non-OECD subsamples. Breaking the EFW into its constituent area scores, larger government size (in terms of expenditures and revenues) appears to be associated with higher labor shares, particularly in for non-OECD countries. The areas of the EFW that drive its positive estimated relationship with labor share are (i) regulation of credit, business and labor and (ii) freedom to trade internationally. While (i) appears to be a statistically and economically significa