The effect of financialization on functional income distribution at different levels of institutional quality: The case of Turkey

The justice in income distribution in Turkey, which continued until the 1970s, began to deteriorate in the following years. The labor market has gained flexibility in many countries, including developed countries. At the same time, goverment expenditures have decreased with the power of unions. However, financialization has accelerated gradually. As a result of these developments, while the share of labor in national income of developed and developing countries decreased, capital income gained momentum. This caused disruption of functional income distribution. The institutional structure of the countries is also effective among the reasons for the change in income distribution. Recently, the effects of factors that reveal the institutional structure of countries, such as institutional quality, economic freedom and democracy, on income distribution have been examined. However, in the economic literature studies examining the impact of these institutional structure elements on fuctional income distribution are limited for Turkey, as for many other countries. The aim of this study is to examine the effects of financialization on the functional income distribution at different levels of institutional quality with emprical methods. The analysis covers annual data for period 1984-2017 in Turkey. This period was preferred in Turkey due to start of financialization with the establishment the Capital Markets Board in 1984 and the unstable period of last six months of 2017. The institutional quality index used to represent institutional quality in the analysis was obtained using Principal Components Analysis. As empirical method ARDL Co-integration Method is applied. According to the results obtained from the ARDL Co-integration analysis it was determined that the effects of institutional quality and union density on the wage share was negative and the effects of financialization, change in technology and institutional quality and financialization interaction on the wage share were positive. The results show that financialization at different levels institutional quality disrupts the distribution of functional income.