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Labour share developments in the euro area

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  • Esther Moral
  • Veronique Genre

Abstract

The declining trend displayed by the share of wages in total income in a large number of countries (in particular, in most of the euro area countries) has been the subject of numerous studies [for example, Giammarioli et al. (2002) and Bentolila and Saint-Paul (2003)], in an attempt to determine the factors that may explain its evolution, as well as the possible consequences for economic growth. The trend in this variable seems to stem from structural causes, in addition to other factors, such as labour supply and demand shocks, which certainly affect its cyclical behaviour. In the presence of nominal rigidities in the economy, cyclical changes in this variable are potentially an indicator of the degree of labour market slack and of underlying inflationary pressures [see Bridgen and Thomas (2003)], and are consequently of interest for monetary policy. It is therefore of great importance to identify the structural factors that may have influenced changes in the labour share, so as to be able to better isolate its movements of a cyclical nature. Although there are no clear theoretical grounds to justify the existence of an equilibrium value for the share of wages in income, empirically, it has been observed that, from a historical perspective, this variable seems to be relatively stable [see Prados de la Escosura and Rosés (2003)]. In this respect some analysts argue that factors such as the gradual deregulation of European labour markets may explain the temporary fall in the labour share observed in the recent period, which will eventually recover its previous level once the effects of these processes come to an end [see Blanchard (1997 and 2005)]. However, others point out that the decline in this variable may be a more persistent phenomenon, reflecting not only widespread wage moderation, but also a gradual and permanent shift in the sectoral composition of the economy towards less labour intensive sectors, such as the financial and business services sector [see De Serres et al. (2001)]. The purpose of this article is thus to analyse the behaviour of the labour share in income in the euro area and to indicate some possible causes, mainly of a structural nature. To do this, sectoral data from the EU KLEMS database, for the period 1970 to 2004, and aggregate National Accounts data, up to 2006, have been used. The rest of the article is organised as follows. The next section describes the main problems associated with the computation of the labour share in income. The third section analyses the observed behaviour of this variable in the euro area economy since 1970, at the aggregate, country and sector levels. It also studies the impact that the change in the economy’s sectoral composition may have had on wage share developments. The fourth section reviews some of the possible long-run determinants of the labour share in income and presents empirical evidence, based on a simple econometric analysis, of the role of some of these explanatory factors in the euro area. Finally, the conclusions are set out in the last section.

Suggested Citation

  • Esther Moral & Veronique Genre, 2007. "Labour share developments in the euro area," Economic Bulletin, Banco de España, issue JUL, pages 97-109, July.
  • Handle: RePEc:bde:journl:y:2007:i:7:n:4
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    References listed on IDEAS

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    1. Prados de la Escosura, Leandro & Rosés, Joan R., 2003. "Wages and labor income in history : a survey," IFCS - Working Papers in Economic History.WH wh031006, Universidad Carlos III de Madrid. Instituto Figuerola.
    2. Marcel P. Timmer & Mary O’Mahony & Bart van Ark, 2007. "EU KLEMS Growth and Productivity Accounts: An Overview," International Productivity Monitor, Centre for the Study of Living Standards, vol. 14, pages 71-85, Spring.
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    Cited by:

    1. Luciano BOGGIO & Vincenzo DALL’AGLIO & Marco MAGNANI, 2010. "On Labour Shares in Recent Decades: A Survey," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 118(3), pages 283-333.
    2. Chi, Wei & Qian, Xiaoye, 2013. "Regional disparity of labor's share in China: Evidence and explanation," China Economic Review, Elsevier, vol. 27(C), pages 277-293.
    3. Linehan, Suzanne & McQuinn, Kieran, 2008. "A Sectoral Analysis of the Average Work Week in Euro Area Countries," Quarterly Bulletin Articles, Central Bank of Ireland, pages 68-88, October.

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