Productivity dispersion and sectoral labour shares in Europe
The stability of the labour share of income is a fundamental feature of macroeconomic
models, with broad implications for the shape of the production function, inequality,
and macroeconomic dynamics. However, empirically, this share has been slowly declining
in many countries for several decades, though its causes are subject of much debate.
This paper analyses the drivers of labour share developments in Europe at a sectoral
level. We begin with a simple shift-share analysis which demonstrates that the decline
across countries has been primarily driven by changes within industries. We then use
aggregated microdata from CompNet to analyse drivers of sector-level labour shares
and to decompose their effects into shifts in the sector average or reallocation of
resources between firms. Our main findings are that the advance of globalisation and
the widening productivity gap between “the best and the rest” have negative implications
for the labour share. We also find that most of the changes are due to reallocation
within sectors providing support for the “superstar firms” hypothesis. The finding
that globalisation has had a negative impact on the labour share is of relevance for
policy in the context of the current backlash against globalisation and reinforces
the need to ensure benefits of globalisation and productivity are passed on to workers.
Published on May 26, 2021
In series:OECD Productivity Working Papersview more titles