Understanding labour income share dynamics in Europe

Arpaia, Alfonso and Pérez, Esther and Pichelmann, Karl (2009): Understanding labour income share dynamics in Europe. Published in: Economic Papers (working papers series) , Vol. 2009, No. 379

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 capitalaugmenting 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 relevance 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 skilled and unskilled labour, the more skilled labour is complementary to capital, the more pronounced the decline in the labour share.

• Item Type: MPRA Paper
• Language: English
• Keywords: labour income share, medium term, two-level CES technology, labour market institutions.
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E25 - Aggregate Factor Income Distribution; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General

References

Acemoglu, D., Aghion, P. & Violante, G. L, (2001), "Deunionization, Technical Change and Inequality", CEPR Discussion Papers 2764.

Bentolila, S. & Bertola, G., (1990), "Firing Costs and Labour Demand: How Bad is Eurosclerosis?", Review of Economic Studies, 57, 381-402.

Bentolila. S. & Saint-Paul, G., (2003), "Explaining Movements in the Labor Share", Contributions to Macroeconomics, Berkeley Electronic Press, vol. 3(1), pages 1103-1103.

Blanchard, O. &Wolfers, J., (2000), "The role of shocks and institutions in the rise of European unemployment: the aggregate evidence", Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.

Blanchard, O. & Giavazzi, F., (2003), "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets", Quarterly Journal of Economics 118, 3, 879-907.

Boeri, T. & Cramer, U., (1992), "Employment Growth, Incumbents and Entrants: Evidence from Germany", International Journal of Industrial Organisation, No.10.

Booth, A.L., (1995), The Economics of the Trade Union, (Cambridge).

Bruno, M. & Sachs, J., (1985), Economics of Worldwide Stagflation, Cambridge, Mass., Harvard University Press.

Caselli, F. & Coleman, W.J, (2001), "Cross-Country Technology Diffusion: The Case of Computers", CEPR Discussion Papers 2744, C.E.P.R.

Fallon, P. R. & Layard, R., (1975) "Capital-skill complementarity, income distribution and output accounting", Journal of political economy, 83 (2), pages 279-302. ISSN 0022-3808.

De Serres, A., Scarpetta, S., & de la Maisonneuve, C., (2002), "Sectoral Shifts in Europe and the United States: How they affect Aggregate Labour Shares and the Properties of Wage Equations",

OCDE. Economic DepartmentWorking Paper 326.

European Commission (2007), "Labour market and wage developments in 2006", European Economy, No. 4, 2007.

European Commission (2009), "The 2009 Ageing Report:

Economic and Budgetary Projections for the EU-27 Member States", European Economy, No. 2, 2009.

Garibaldi, P., Konings, J. & Pissarides, C.A., (1997), "Gross Job Reallocation and Labour Market Policy", Unemployment Policy: Government Options for the Labour Market. Edited by D.J.

Snower and G. de la Dehesa, Cambridge University Press, Cambridge.

Goldin, C. & Katz, L. F., (1996), "The Origins of Technology-Skill Complementarity", NBERWorking Papers 5657, National Bureau of Economic Research, Inc.

Gollin, D., (2002), "Getting Income Shares right", Journal of Political Economy, 110(2), 458–74. Gordon, R., (2005) "Where Did the Productivity Growth Go?", NBERWorking Paper 11842.

Griliches, Z., (1969), "Capital-Skill Complementarity", The Review of Economics and Statistics, MIT Press, vol. 51(4), pages 465-68, November.

Hamermesh, D.S., (1993a), Labour demand, Princeton University Press.

Hamermesh, D.S. & Pfann, G.A., (1996), "Adjustment Costs in Factor Demand", Journal of Economic Literature, Vol. XXXIV, September 1996, pp. 1264-1292.

Hansen, G.D. & Prescott, E.E., (2005): "Capacity Constraints, Aymmetries, and the Business Cycle", Review of Economic Dynamics, 2005(1), 850-865.

Harrison, A., (2003), "Has Globalization Eroded Labor’s Share? Evidence from Cross-Country Data", Working Paper, University of California-Berkeley.

Hicks, J.R., (1963), The Theory ofWages, 2nd ed., Macmillan, London.

Jaramillo, F., Schiantarelli, F. & Sembenelli, A., (1993), "Are Adjustment Costs for Labour Asymmetric? An Econometric Test on Panel Data for Italy", Review of Economics and Statistics, November 1993, 74(4), pp. 640-48.

Jones, C. I., (2003), "Growth, Capital Shares, and a New Perspective on Production Functions",Working Paper.

Kessing, S., (2001), "A note on the determinants of labour share movements", 2003, Economics Letters, 81 (1), 9-12.

Klump R., McAdam P. &Willman A., (2007), "Factor Substitution and Factor Augmenting Technical Progress in the US", Review of Economics and Statistics (2007) 89(1):183–92.

Klump, R., & Preissler, H. (2000), ‘CES Production Functions and Economic Growth’, Scandinavian Journal of Economics, 102(1), 41–56.

Krusell, P., Ohanian, L. E., Rios-Rull, J.V. & Violante, G.L., (2000), "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis", Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.

Lagarde, S., E. Maurin & C. Torelli (1994), "Créations et Suppressions d’emplois en France: une étude de la période 1984-1992", Economie et Prévision, 67-88. de La Grandville, O., (1989), "In quest of the Slutsky diamond", American Economic Review, 79(3), 468-481.

Leontief,W., (1947), "Wages, Profits, Prices and Taxes", Dun’s Review.

McAdam, P. & Willman, A., (2004b), "Supply, Factor Shares and Inflation Persistence: Re-examining Euro-area New-Keynesian Phillips Curves", Oxford Bulletin of Economics and Statistics, 66(9), 637–70.

Messina, J., & Vallanti, G., (2006), "Job Flow Dynamics and Firing Restrictions: Evidence from Europe", IZA DP No. 2045.

Oliveira, J., Scarpetta, S. & Pilat, D., (1996), "Mark-Up Ratios in Manufacturing Industries. Estimates for 14 OECD countries", OECD Economics DepartmentWorking Papers, No. 162.

OECD, (1999), Employment Outlook (ch. 2), Paris.

OECD, (2007), Employment Outlook (ch. 3), Paris.

Papageorgiou, C. & Saam, M., "Two-Level CES Production Technology in the Solow and Diamond Growth Models", DepartmentalWorking Papers 2005-07, Department of Economics, Louisiana State University.

Palm, F.C., & Pfann, G.A. (1993), "Asymmetric adjustment costs in non-labour demand models for the Netherlands and U.K. manufacturing sectors", Review of economic studies, 60, 297-312.

Piketty, T., (2007), "Income, wage and wealth inequality in France, 1901-98", in A B Atkinson and T

Piketty editors, Top incomes over the Twentieth Century, Oxford University Press, Oxford.

Piketty, T. & Saez, E., (2007), "Income, wage and wealth inequality in the United States, 1913-02", in

A B Atkinson and T Piketty editors, Top incomes over the Twentieth Century, Oxford University Press, Oxford.

Ríos-Rull, V., &Santaeulàlia-Llopis, R., (2007), "Redistributive Shocks and Allocative Shocks", Mimeo, University of Pennsylvania.

Sato, K., (1967), "A two-level constant elasticity of substitution production function", Review of Economic Studies 34 (1967, April).

Saito, M., (2004), "Armington elasticities in intermediate inputs trade: a problem in using multilateral trade data", IMF Working Paper, 2004, No. 22.

Trigari, A., (2004), "Equilibrium unemployment, job flows and inflation dynamics", Working Paper Series 304, European Central Bank.

Ventura, J., (1997), "Growth and Interdependence", Quarterly Journal of Economics 62, 57-84.

Weder, M. & Grubel, H.G., (1993), The New Growth Theory and Cosean Economics: Institutions to Capture Externalities,Weltwirtschaftliches Archiv 129, 488-513.

Young, A.T., (2004): "Labour’s Share Fluctuations, Biased Technological Change, and the Business Cycle", Review of Economic Dynamics, 2004(7), 916-931.

Zuleta, H., & Young, A. T.,(2007), "Labor’s Shares – Aggregate and Industry: Accounting for both in a model of unbalanced growth with induced innovation", Documentos de trabajo 003105, Universidad del Rosario, Facultad de Economia.