The effect of financialization on functional income distribution: The case of Türkiye

The neo-liberal approach, which came to the forefront as Keynesian policies, having experienced their golden age after World War II, began to lose their influence, rapidly spread to the globalizing world economies, particularly from 1980 onward. In addition to technological advancements, the swift liberalization of the financial sector paved the way for a phenomenon known as financialization in this new era of capitalism. Financialization, which gained momentum as the barriers in front of the advanced financial system were largely removed, is a concept highlighted by heterodox economists and is said to have a negative impact on macroeconomic variables, particularly income distribution. In this context, the aim of this study is to investigate the effect of financialization on functional income distribution in Turkey for the period between 1988 and 2019 using time series analysis. The financialization index used in the model, representing the level of financialization in the Turkish economy during the analyzed period, was uniquely obtained within this study through Principal Component Analysis. According to the results of the ARDL Bounds Test, financialization in Turkey plays a role in the erosion of labor share, following technological advancement and trade openness variables, and disrupts functional income distribution. On the other hand, the results of the Fourier Toda-Yamamoto Causality Test indicate a causality from financialization to labor share. All these findings suggest that financialization should be considered an important parameter in examining income inequality due to the recent decline in labor share, which has been the subject of contemporary studies.