Stability of the labour shares: evidence from OECD economies

In light of ongoing concern about rising inequality in the developed economies, this paper revisits the old standing issue of the stability of the labour share. The paper focuses specifically on the empirical aspect of the problem and considers statistical properties of the labour share in OECD economies over 1960-2014 period, using a battery of time series models and unit root tests. We account for structural changes in labour share using Lagrange Multiplier (LM) unit root tests with up to two structural breaks, address the problem of heterogeneous level shifts using LM panel unit root test, and examine four types of statistical patterns (trend stationarity, mean reversion, random walk with and without drift) using Augmented Dickey-Fuller (ADF) test. Empirical results indicate diverse patterns in labour share movements, with downward deterministic trend with break(s) being the most preponderant. The upward trends are observed in a limited set of economies (Belgium, Luxembourg, and Netherlands). Overall, the stability of labour share hypothesis appears to find only weak support. Exploratory analysis demonstrates that most of the structural breaks are economically significant, short-term fluctuations in series correlate strongly with business cycle turning points, whilst medium-term movements in labour share are adequately explained in terms of broader political and also country-specific factors.