Working Paper

Credit and the Labor Share: Evidence from U.S. States

Abstract: We analyze the role of credit markets in explaining the changes in the U.S. labor share by evaluating the effects of state-level banking deregulation, which resulted in improved access to cheaper credit. Utilizing a difference-in-differences strategy, we provide causal evidence showing labor share declined following the interstate banking deregulation. We show that the lower cost of credit, increase in the availability of credit, and greater bank competition in each state are mechanisms that led to the decline in the labor share. We use this evidence to obtain the elasticity of labor share with respect to borrowing costs, which itself is informative about the aggregate elasticity of substitution between capital and labor. Finally, we focus on manufacturing and services to show that the impact of banking deregulation is particularly important in capital intensive and external finance dependent industries.

JEL Classification: E21; E22; E25; G21; G28;

https://doi.org/10.24149/gwp326

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2017-08-01

Number: 326

Pages: 63 pages