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Author(s): Alfonso Arpaia, Esther Pérez and Karl Pichelmann
Understanding Labour Income Share Dynamics in Europe - Alfonso Arpaia, Esther Pérez and Karl Pichelmann (785 kB)
Summary for non-specialists (76 kB)
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
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
DOI:10.2765/37596
KC-AI-09-379-EN-N (online) | |
ISBN 978-92-79-11190-7 (online) | |
ISSN 1725-3187 (online) | |
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