Abstract
The stability of the labour share of income is a fundamental feature of many macroeconomic models. Empirically however, the labour share varies considerably across countries and across sectors within countries. In addition, gradual declines in the labour share have been documented in many countries leading to much debate on the causes of the reduction. This paper examines several of the potential drivers of variation in the labour share across countries and sectors in Europe. Beginning with a simple shift-share analysis, we demonstrate that observed changes has been primarily driven by changes within rather than between sectors. We then use aggregated microdata to investigate the strength of correlation between sectoral distributions of labour shares and measures of productivity and market power. Our main findings are that the advance of globalisation and a widening productivity gap from the rise of “superstar firms” are negatively related to the labour share, and that this negative relationship is stronger for the reallocation margin within sectors compared to its link to between sector reallocation.
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Notes
It occurred in seven of the eight largest economies of the world, in emerging markets such as China, India and Mexico that have opened up to international trade, and even in Scandinavian countries where levels of labour unionisation has traditionally been strong (Karabarbounis and Neiman 2014).
See Anderton et al. (2017) for the factors that can explain wage rigidities in both an upturn and downturn.
By using micro-aggregated data focusing on firms and their employees, this removes the confounding effects of self-employment on labour share estimates (Adrjan 2018).
Andrews et al. (2016) were among the first to identify the diverging productivity trends between ‘frontier’ and ‘laggard’ firms globally.
Falvey et al. (2011) develop a heterogeneous firm model to illustrate how productivity gaps are impacted by participation in global value chains.
The reader must be aware that data collection rules and procedures across countries are different, and out of CompNet’s control. Hence, despite all efforts made to improve sample comparability across countries (including the use of population weights), some country samples might still suffer from biases. For a more detailed account of raw data characteristics and sample biases, please refer to the Cross-Country Comparability Report (CompNet 2018b).
Lopez-Garcia et al. (2014) checked correlations of sector-year turnover and labour from CompNet for a number of countries with official statistics from Eurostat as part of a data validation exercise, obtaining correlations between 0.7 and 0.9. Gutierrez and Piton (2020) contrast KLEMS and CompNet based labour share estimates for manufacturing industries, showing that they behave remarkably similar.
Although not the focus of this paper, this may allude to a high cost of reallocation with important implications for productivity growth.
See Appendix 1 for more detail on the Irish labour share and 2015 distortions.
The relationship is estimated via OLS to enable this decomposition. However, given that the labour share is a persistent variable, this may lead to bias in the estimated coefficients. Although not verified in this paper, OLS—ignoring this persistence – will be valid as long as the estimated relation is a long-run vector.
See Berlingieri et al. (2017) for further evidence widening gaps of these being present across a number of countries using firm-level data.
See Kılınç (2018) for the issues relating productivity measurement and the need to control for mark-ups.
Broadly similar results can be obtained by using the standard deviation as the measure of dispersion.
Falvey et al. (2011) develop a heterogeneous firm model to illustrate how productivity gaps are impacted by participation in global value chains.
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Appendix 1. Irish Labour Share and GDP Measurement Issues
Appendix 1. Irish Labour Share and GDP Measurement Issues
According to standard aggregates, the share of national income going to wages in Ireland has fallen consistently in recent decades and European Commission data show that the wage bill expressed as a fraction of GDP in Ireland is the lowest in the European Union.
However, the decline in the labour income share of value added is clearly overstated by the significant growth of the multinational sector since the 1980’s and, more recently, by distortions arising in parts of the multinational sector which artificially inflate (non-labour) activity in Ireland, most notably with the exceptional growth rate recorded in 2015.
Department of Finance (2018) showed that using modified GNI as the numerator, which excludes much of the statistical distortions arising from globalisation, enables a more meaningful analysis of trends in the labour income share over time. Figure 5 below shows the labour share of time with GDP, GNI and GNI* as the numerators. All demonstrate a negative trend over time, in line with the global decline. The GNI* measure has a much higher level however, and does not display the level shift in 2015. In fact, the GNI* based labour share is much more in line with the EU average, as illustrated in Fig. 6.
Irelands labour share in GDP, GNI and GNI* terms
Irelands GNI*—based labour share vs. EU labour share
Concentration (blue) and productivity dispersion (red) trends by country, average across sectors
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Lawless, M., Rehill, L. Market Power, Productivity and Sectoral Labour Shares in Europe. Open Econ Rev 33, 453–476 (2022). https://doi.org/10.1007/s11079-021-09653-3
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DOI: https://doi.org/10.1007/s11079-021-09653-3