Corporate cost and profit shares in the euro area and the US: the same story?

This paper presents evidence of how the shares of labour and capital costs and profits in the gross value added of corporate sectors of France, Germany, Italy, Spain and the US varied between 1995 and 2016, and seeks to explain the differences between countries and how they have developed over time. The descriptive evidence does not support the hypothesis of a convergence in the composition of the countries’ corporate gross value added in the period, either within the euro area or between Europe and the US, nor is there evidence of a generalised downward trend in the share of labour costs over time. The parallel upward trend in the corporate profit share of the US and Germany between 2000 and 2016 stands out, with German corporate profit share consistently above that of the US. The evidence presented here supports the claim made by other studies that increasing corporate market power is the main driver of changes in the composition of gross value added over time in the case of the US. In the euro area countries, labour and capital shares are also sensitive to changes in the relative input prices of labour and capital (consistent with an inferred elasticity of substitution between labour and capital in production that is less than one, compared with the inferred value of one for the US). Finally, to explain the high and increasing German corporate profit share, it is necessary to account for the sustained comparative production cost advantage of German corporations.