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Understanding Labour Income Share Dynamics in Europe

Author

Listed:
  • Alfonso Arpaia
  • Esther Pérez
  • Karl Pichelmann

Abstract

This paper seeks to understand labour share dynamics in Europe over the medium run. After documenting basic empirical regularities, we quantify the contribution of shifts in the sectoral and the employment composition of the economy to labour share movements. The findings from the shift-share analysis being on the descriptive side, we next identify the factors underlying labour share behaviour through a model-based approach. We proceed along the lines of Bentolila and Saint Paul (2003) but adopt a production function with capital-skill complementarity. We show that labour share movements are driven by a complex interplay of demand and supply conditions for capital and different skill categories of labour, the nature of technological progress and imperfect market structures.Based upon robust calibration, we show that most of the declining pattern in labour shares in nine EU15 Member States is governed by capital deepening in conjunction with capital-augmenting technical progress and labour substitution across skill categories. Although institutional factors also play a significant role, they appear to be of somewhat less importance.To illustrate the force of the technological explanation we quantitatively assess the dynamic impact of a permanent reduction in the fraction of unskilled employment on the labour share. We find that, for a given elasticity of substitution between the two categories of labour, the more skilled labour is complementary to capital, the more pronounced the decline in the labour share.  Â

Suggested Citation

  • Alfonso Arpaia & Esther Pérez & Karl Pichelmann, 2009. "Understanding Labour Income Share Dynamics in Europe," European Economy - Economic Papers 2008 - 2015 379, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:ecopap:0379
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    References listed on IDEAS

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    More about this item

    Keywords

    Labour income share; medium term; two-level CES technology; market institutions; Understanding Labour Income Share Dynamics in Europe; Alfonso Arpaia; Pérez; Pichelmann;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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