Alfonso Arpaia, Esther Pérez and Karl Pichelmann
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
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.
JEL classification: E25, J30, L51
(European Economy. Economic Papers. 379. May 2009.
Brussels. 52pp. Tab. Graph. Bibliogr. )