Debunking the Myth of Labor Market Deregulation

If you believe labor market deregulation is a good for business, you may want to check out the Bank for International Settlements working paper, "The Global Upward Trend in the Profit Share." Researchers found that profit share has been increasing all over the world, and that at least 14 of the 19 countries examined were more than two points above their post-1940 average for the first time in 2004. The cause: technological innovation, not labor market deregulation.

The blogger over at Sox First summed up the study nicely:

These faster innovation rates create more churn in the labor market which increase the firms' bargaining power.

However, the increased profit share was amplified in countries with more regulated labor markets. Why has this happened. Because when everyone is operating in a deregulated market, the increased margins are competed away. However, the companies that can maintain technological innovation hold on to strong margins with the constant churn and renewal.

"Notwithstanding a couple of obvious outliers, it appears that more regulated labor markets are associated with stronger upward trends in the profit share,'' the paper said. "It might be that the lack of flexibility in the labor market allows firms to capture part of the available rents.''

In other words, according to the paper, the more important drivers for business returns are capital, innovation and to an extent regulation, not cheap labor which is plentiful and available to all comers.