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Hogrefe, Jan; Kappler, Marcus

Working Paper

The labour share of income:

Heterogeneous causes for parallel

movements?

ZEW Discussion Papers, No. 10-024

Provided in cooperation with:

Zentrum für Europäische Wirtschaftsforschung (ZEW)

Suggested citation: Hogrefe, Jan; Kappler, Marcus (2010) : The labour share of income:

Heterogeneous causes for parallel movements?, ZEW Discussion Papers, No. 10-024, http:// hdl.handle.net/10419/32787

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zbw Leibniz-Informationszentrum Wirtschaft Leibniz Information Centre for Economics Discussion Paper No. 10-024

The Labour Share of Income:

Heterogeneous Causes for Parallel Movements?

Jan Hogrefe and Marcus Kappler Discussion Paper No. 10-024

The Labour Share of Income:

Heterogeneous Causes for Parallel Movements?

Jan Hogrefe and Marcus Kappler

Download this ZEW Discussion Paper from our ftp server:

ftp://ftp.zew.de/pub/zew-docs/dp/dp10024.pdf Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.

Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.

Non-technical summary 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.

Das Wichtigste in Kürze Eine stetig fallende Arbeitseinkommensquote (AEQ), gerade in Kontinentaleuropa, hat das Interesse sowohl der Politik als auch der akademischen Forschung in dieses Maß makroökonomischer Verteilungsgrechtigkeit erneuert. Während die Forschung die AEQ lange als über die Zeit konstant angesehen hat, wird dieses makroökonomische "Faktum" immer mehr in Frage gestellt. Die Debatte hat in den letzten Jahren vielfältige Gründe für ein Absinken der AEQ zu Tage gefördert: Einflüsse des Strukturwandels und des technologischen Fortschritts, Globalisierungstendenzen und die institutionelle Struktur eines Landes - gerade mit Blick auf den Lohnverhandlungsprozess.





Ziel dieser Studie ist es, empirisch zu analysieren, welche Faktoren in welchen Ländern tatsächlich für die angesprochenen Trends verantwortlich sind. Im Detail richten wir den Fokus auf eine korrekte dynamische Spezifikation des Schätzmodells und darauf die Annahme der Gleichheit des Einflusses einzelner Faktoren zu testen, welche vielen Studien zum Thema innewohnt. Hierfür verwenden wir sogenannte "fixed effects", "pooled mean group" und "mean group" Schätzer. Letztere vereinen Heterogenität und Dynamik in einem Panel-Rahmen.

Für viele OECD Länder finden wir negative Effekte für zwei wichtige erklärende Variablen: Das Kapital-Output Verhältnis und die Handelsoffenheit eines Landes. Darüberhinaus können wir für diese Variable die Homogenitätsannahme nicht verwerfen. Dieses wichtige empirische Ergebnis liefert bedeutende Unterstützung für theoretische Ansätze zur Erklärung der AEQ. Andere, häufig in der Literatur verwendete Variablen, liefern ein weniger klares Bild. Gerade der Einfluss der totalen Faktorproduktivität scheint sehr heterogen über die Länder im Datensatz verteilt zu sein.

Um weitere Aussagen bezüglich der Wirkung institutioneller Rahmenbedingungen, insbesonere bezüglich des Lohnsetzungsprozesses, zu treffen, teilen wir unseren Datensatz in zwei Ländergruppen. Wir unterscheiden einerseits Länder mit starken und andererseits Länder mit schwächeren Gewerkschaften. Hieraus ergeben sich wichtige Unterschiede in der Wirkung einzelner Variablen. Für eher markt-orientierte Länder führen wir Veränderungen in der AEQ auf technologischen Wandel und Veränderungen im Faktoreinsatzverhältnis zurück. Für Länder, in denen Gewerkschaften eine starke Rolle einnehmen, zeigt sich die Handelsoffenheit als hauptverantwortlich. Hier scheinen die Gewerkschaften in einer globalisierten Welt weniger in der Lage, ihre Macht im Verteilungsprozess durchzusetzen.

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

–  –  –

Abstract

The aim of this paper is to take a structured approach at estimating the coefficients of factors explaining movements of the labour share across countries. In particular, we focus on proper dynamic 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 in a dynamic heterogeneous panel framework.

We find support for a dynamic estimation setup and derive statements regarding the homogeneity assumption with respect to the three most prominent explanatory variables in the literature: the capital-output ratio, total factor productivity and trade openness. In addition, we take account of different institutional arrangements across countries.

JEL codes: C23, E23, E25, F16 Keywords: factor income, labour share, dynamic heterogeneous panel models ∗ The authors would like to thank Claudia Busl, Andreas Sachs, Simeon Vosen and participants at workshops and seminars in Berlin, Dresden and Mannheim for valuable comments and discussion.

Maximilian Kohl provided excellent research assistance. All errors are, of course, our own.

† corresponding author. Centre for European Economic Research (ZEW), P.O. Box 103443, D-68034 Mannheim, Germany.

1 Introduction

The share accruing to labour in the division of national income is one of the classical topics of macroeconomics. However, it lay dormant for decades—assumed away in standard macroeconomic treatments as constant and straightforwardly derived from a Cobb-Douglas production function. This constancy of the labour share has recently been challenged and with it one of the stylized facts in macroeconomics. Declining labour shares in a large number of countries, particularly in continental Europe, have brought the topic back onto the political agenda - often accompanied by passionate discussions about implied inequality concerns. To put it shortly: It seems as if the labour share is making an impressive comeback.1 Figure 1 clearly shows the source of concern: For a sample of OECD countries, the labour share has on average declined by roughly seven percentage points since 1980.

For individual countries the picture is similar. All countries in the sample individually report a decline except for the United States where the labour share has nearly remained constant.2

–  –  –

See Atkinson (2009) and the references therein for a re-appraisal.

See section 4 for descriptive statistics, details on the sample and the computation of variables.

In the face of labour shares declining almost in parallel across a vast majority of developed countries, several recent studies try uncovering the underlying forces and possible implications. The strands of arguments may roughly be grouped into the following segments: 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 effects of changes in relative factor inputs in production and technological change are most prominently discussed in Bentolila and Saint-Paul (2003). They show that the impact of changes in relative factor inputs and factor prices can be comprehensively modelled via the capital output ratio. The direction of the impact on the labour share then depends on the elasticity of substitution between labour and capital. With the two factors being substitutes, the labour share declines with an increase in the capital output ratio. As far as technological change is concerned, they show that only capital augmenting technological change has the potential to shift the capital output schedule and create long-term downward pressure on the labour share. A recent contribution by Arpaia et al. (2009) extends this model to incorporate different skill categories of labour to highlight the important issue of capital-skill complementarity.



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