Abstract:For the global decline in labor income share over the past three decades, a theoretical analysis is made on the impact of capital account openness based on the wage bargaining model. Disaggregated manufacturing data of more than 120 countries during 1965-2010 as well as difference-in-difference method is used to conduct empirically tests. The results show that, on the whole, the capital account openness does not have a significant impact on the share of labor income. However, the subsample analysis shows there is a negative impact on the share of labor income in developing economies. The higher degree of external finance dependence is for an industry, the greater the negative impact is. The change of bargaining power for capital and labor is key for the formation of these results. Further mechanism analysis supports that capital account openness has led to the significant decline of labor’s wage bargaining power in developing economies, yet not in developed countries.