Understanding Labour Income Share Dynamics In Europe

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Executive Summary

This paper seeks to understand labor share dynamics in Europe over the medium run. After documenting basic empirical regularities, the authors quantify the contribution of shifts in the sectoral and the employment composition of the economy to labor share movements. The findings from the shift-share analysis being on the descriptive side, they next identify the factors underlying labor share behavior through a model-based approach. They proceed along the lines of Bentolila and Saint Paul (2003) but adopt a production function with capital-skill complementarily. They show that labor share movements are driven by a complex interplay of demand and supply conditions for capital and different skill categories of labor, the nature of technological progress and imperfect market structures.

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