The Labour Share of Income: Heterogeneous Causes for Parallel Movements?

Declining labour shares in a large number of countries, particularly in continental Europe, have renewed the academic and political debate about the factors which explain these downward trends. While the share accruing to labour in the division of national income was long being seen as constant over time, this stylised fact has recently been challenged. Several explanations for temporal and persistent movements of the labour share have been brought forward in the debate: effects of structural and technological change, influences of globalisation and increased product market integration, and the importance of institutional settings, often with a focus on wage bargaining structures. The aim of this paper is to take a structured empirical approach at assessing the relative importance of those factors across countries. In particular, we focus on proper dynamic model specification and test the validity of the homogeneity assumption of slope coefficients frequently implied in previous studies. We employ fixed effect estimators as well as pooled mean group and mean group estimators, the latter two in a dynamic heterogeneous panel framework. In a sample of OECD countries, we find negative effects for two explanatory variables of the labour share: the capital output ratio and trade openness. Furthermore, we are not able to reject the homogeneity assumption on the slope coefficients. This first finding lends important support to the standard theory on labour share movements. However, as far as other explanatory variables often found in the literature go, the picture is more mixed. Total factor productivity, in particular, is found to exert heterogeneous effects across countries and no clear support for the pooling assumption of slope coefficients in a linear dynamic model is found. In order to add more detail to our analysis and to address the role of institutional arrangements, in particular with respect to the bargaining process, we split the sample into two groups of countries characterised by differently strong unions. We find important differences in the coefficient values and levels of significance. For more marketoriented countries with lower union density, we see the labour share being driven down by variables capturing technological change and shifts in the relative usage of factors of production. For countries with strong unions, however, we find trade openness to be the most relevant explanatory factor for downward movements of the labour share. We conclude this is due to trade openness reducing the possibilities of unionised employees to secure a wage markup in the distribution of factor incomes.

Hogrefe, Jan and Marcus Kappler (2010), The Labour Share of Income: Heterogeneous Causes for Parallel Movements?, ZEW Discussion Paper No. 10-024, Mannheim.