Changed Industrial Relationship by Offshoring Threat and Labor Share: An Empirical Game-Theoretic Analysis

Abstract Research indicates that the labor share of the aggregate income has decreased steadily since the mid-1970s, i.e. when the globalization process began. This paper discusses the ways in which qualitative changes in globalization, coupled with increased offshoring, have changed industrial relationships. In our analysis, we consider a simple Nash bargaining model between employers and employees. Our model proposes the hypotheses that employees gain the power to increase their wages when employers do not have the option of offshoring. However, employees typically lose this power when employers possess an offshoring threat, culminating in wage deduction. Leveraging a panel set of data obtained from 18 OECD countries during the period 1975–2017, we have empirically confirmed these hypotheses by comparing the first phase of globalization—not characterized by an offshoring threat—with the second phase, which entails an offshoring threat. Our findings reveal that workers’ bargaining power, positively affects labor share in the first phase; however, it loses its effect in the second phase when offshoring exerts its negative effects on labor share. We conclude that a qualitative change in globalization with increased offshoring radically changed industrial relationship through the threat effect.