Extended Summary

Deindustrialization is the rise in the share of the services sector in the economy in a natural process of structural change after the industrial sector has reached a certain maturity, and it was first experienced by developed countries. Before the 1990s, deindustrialization was explained by structural change due to internal (within-country) factors in developed countries and was a stage of the development process. In this sense, according to Rowthorn and Coutts (2004) the sources of deindustrialization are the transfer of domestic activities from manufacturing to the service sector due to specialization, the decrease in the share of manufacturing in total consumer expenditures due to the decrease in the relative prices of manufacturing products, slower employment growth in manufacturing than in services due to higher productivity growth in manufacturing than in services, negative effects of international trade on manufacturing employment in developed countries. On the other hand, many middle-income developing countries experienced a process of deindustrialization that is not a stage of development. It is noteworthy that this process took place when these countries started to implement the export-oriented industrialization and liberal economic policies. In this sense, deindustrialization in developing countries follows a market-based approach based on neoliberal policies of liberalization and privatization of the 1980s. Deindustrialization in these countries, that is, the decreasing trends in the share of industrial employment or the industrial value added, occur simultaneously with sudden and unregulated capital inflows and, therefore, with the overvaluation of the domestic currency. Indeed, Palma (2005) suggests this situation in these countries as an example of the Dutch Disease. Deindustrialization is considered as a result of a country’s discovery of important natural resources, the increase in exports of primary products or services (tourism and the financial sector), or policy changes in middle-income countries. In this context, with reference to the neoliberal liberalization policies based on the Washington Consensus and shown by international organizations as the recipe for these countries to get out of debt and currency crises since the 1980s, it is important to argue that deindustrialization in these countries has taken place with the effect of policy changes on the basis of financial liberalization.

This transformation in the form of an early shift from the industry to the services sector, has consequences in terms of income distribution in an economy. According to Kuznets (1955) fundamental hypothesis, as individuals move from the agricultural sector (where wages are homogeneously low) to the industrial sector (where wages are typically high) in the early stages of economic development, they will observe an increase in their income, increasing inequality due to inter-sectoral wage differentials. In the later stages of development, as the transformation continues and all individuals are employed in the modern sector, inequality will decrease and the relationship between economic development and inequality will turn negative. The decrease in the share of industrial employment and value added and the increase in the share of services in terms of the same indicators are considered as a new Kuznets phase. There are findings in the literature that the shift of labor/employment to the non-agricultural sector causes inequality if the dominant sector is the services sector rather than the manufacturing industry, or that direct industrial employment reduces inequality. Both the decrease in industrial employment with deindustrialization, finding its place in the increase in precarious employment in the services sector, and flexible working conditions in labor markets, precarious employment, decrease in union membership/collective bargaining level and low wages as a result of neoliberal policies based on globalizing economic policies produce undesirable effects in terms of income distribution.

The aim of this study is to investigate the effects of deindustrialization and deunionization on income distribution separately and interactively. For this purpose, the effects of deindustrialization and de-unionization (reduction in the level of collective bargaining) on ​​income distribution for Latin American countries and Turkey, which are considered as early deindustrializing countries, are tested through the panel cointegration test for the period of 2000-2019. The findings indicate that industrialization improves income distribution, while de-unionization deteriorates income distribution; in addition, the increase in the level of industrialization alleviates the disrupting effects of de-unionization to some extent. As a result of these findings, which reveal the necessity of considering industrialization and unionization as a whole, policy makers should consider the negative distribution effects that early deindustrialization has created on different segments of society. Industrial production that will create employment and value-added should be supported by reducing short-term and return-oriented capital inflows. In terms of labor markets and aggregate demand as a source of production, rather than neoliberal deregulation policies, regulations that will protect the rights of wage workers and provide guaranteed employment should be put on the policy agenda.