The Unassuming Economist

From a new IMF working paper by Dilyana Dimova:

“The labor share in Europe has been on a downward trend. This paper finds that the decline is concentrated in manufacture and among low- to mid-skilled workers. The shifting nature of employment away from full-time jobs and a rollback of employment protection, unemployment benefits and unemployment benefits have been the main contributors. Technology and globalization hurt sectors where jobs are routinizable but helped others that require specialized skills. High-skilled professionals gained labor share driven by productivity aided by flexible work environments, while low- and mid-skilled workers lost labor share owing to globalization and the erosion of labor market safety nets.

The value-added share accrued to labor commonly known as the labor share—the ratio of labor compensation (wages and benefits) to national income—has been on a downward trend in the EU in the last couple of decades (Figure 1). This trend is observed both in recession-hit Advanced Economies (AE) like Ireland, Portugal and Spain as well as in economically prosperous Germany and the Netherlands (Figure 1, upper panels), and began around 2012–13 after the Great Recession (GR). In New Member States (NMS), Estonia, Hungary, Latvia and Lithuania experienced a decline in 2009–15 and are on the rebound (Figure 1, lower panels). Other NMS economies such as Croatia, Poland and Romania have yet to return to their 2002 levels. The positive exception is Bulgaria whose labor share has been on an upward trend due to an economic deepening from relatively low levels.

This paper looks at the evolution of the labor share by industry and by skill level and considers the effect of various structural factors on the EU-wide stagnation and erosion of the labor share. Following Dao et al. (2017), first a shift-share analysis is used to demonstrate the extent to which the downward trend in the labor share is driven by within-sector/skill category declines or by changes across sectors/skill category. The analysis establishes that within-sector/skill category changes account for the majority of labor share fluctuations and provides justification for the structural factor analysis. Then the paper quantifies the extent to which structural drivers track changes in the labor share in 28 EU-member countries, representing both advanced economies and transitional economies, in a cross-country panel study that uses disaggregated data for twelve industry sectors and three skill categories.”