Dynamics of Labor Shares in Pakistan

Abstract

This paper investigates the dynamics of labor share in Pakistan’s economy, analyzing the impacts of firm-level determinants on labor share and its correlation with economic growth. Fixed effects and between effects regression models are used in this study to examine both within-firm variation and inter-firm differences using a panel dataset from 2012 to 2020. The findings indicate that, large firms have higher interest cost, and have greater market power typically allocate a smaller percentage of their value-added to labor share. On the contrary, higher GDP levels are positively correlated with employee compensation, emphasizing the significance of macroeconomic factors. This study presents a number of policy recommendations: assisting smaller firms, controlling market power of large firms, ensuring stable macroeconomic conditions, enhancing credit availability, investing in human capital, and fostering export competitiveness. The purpose of these polices is to promote sustainable economic development in Pakistan and improve the equitable distribution of growth benefits.