## 1. The Labor Share in the EU ## Source details **Canonical URL:** [1. The Labor Share in the EU](https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019067.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2019/wpiea2019067.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2019/wpiea2019067.pdf.json) --- ### Introduction and scope - Focus: evolution of the labor share (ratio of labor compensation to national income) across 28 EU countries, by industry (11 sectors) and by skill category (three skill groups). - Coverage: primarily 2002–2016 for sectoral analysis; skill categories up to 2014. - Approach: shift-share analysis and cross-country panel regressions linking labor share changes to structural factors (employment structure, labor market policies, goods market structure) and cyclical controls. - Panel composition: 17 Advanced Economies (AE) and 11 New Member States (NMS) where complete data are available. ### Major trends (high-level findings) - Aggregate and distributional trends: - Labor share has been on a downward trend in the EU in the last couple of decades; the trend began around 2012–13 after the Great Recession. - Low-skilled jobs: labor share fell by 1.7 percentage points (linear trend, 2002–14). - Mid-skilled jobs: labor share fell by 1.9 percentage points (linear trend, 2002–14). - High-skilled occupations: labor share increased by 2 percentage points on average (2002–14). - Declines concentrated in goods-producing industries; services generally held or gained labor share. - Within-sector/skill-category changes account for the majority of labor share fluctuations; between-industry reallocation explains only 17 percentage points on average, and between-skill reallocation 22 percentage points on average. - Notable country and sector extremes: - Greece and Malta: low-skilled labor share declined by 5 percentage points; Croatia declined by 4 percentage points. - Mid-skilled declines were 4–8 percentage points in Austria, Luxembourg, Slovakia and Romania. - Manufacturing labor share shrank by up to 3 percentage points in Finland and Malta (sectoral linear trend). - Construction labor share declined by 2.5 percentage points in Ireland and Spain (sectoral linear trend). - Greece: between-industry reallocation accounted for one-third of labor share change. - Ireland: large within-industry labor share loss partly offset by between-sector reallocation. ### Structural drivers — empirical contributions - Employment structure indicators: - Rise in part-time employment and in temporary contracts are among the main contributors to lower labor share in almost all countries and sectors. - A rise in temporary contracts is responsible for up to 3 percentage points decline in the labor share in some countries (Poland highlighted). - The fall in self-employment partly offset labor share declines because self-employment share largely decreased in many EU economies. - Labor market policies: - Declines in unemployment benefits, declines in unionization, and erosion of employment protection together contributed up to 1 percentage point loss in several sectors and in countries with shrinking labor share (examples: Germany and the Netherlands). - Unionization rate dropped in all EU economies except Italy and Spain. - Goods market and technology: - Technology (proxied by the relative price of investment goods) depressed labor share selectively — notably in routinizable sectors such as trade and travel — but raised productivity and labor share for specialized workers in agriculture, construction, and professional services in some countries. - Import penetration (globalization) raised labor share in some transitional (NMS) economies where domestic wages were relatively low, but contributed to declines in some AE manufacturing sectors. - Global value chains: forward and backward link changes had mixed and generally smaller correlations with labor share; forward link expected to be positive for domestic labor share while backward link expected to be negative, with empirical heterogeneity. ### Sectoral and skill-specific results (selected quantitative highlights) - Selected regression coefficients and sectoral results: - Total economy: - lagged labor share coefficient 0.798*** - self-employment share coefficient -0.234** - temporary contracts coefficient -0.250* - unemployment benefits coefficient 0.034** - employment protection coefficient 0.729** - Manufacture: - lagged labor share 0.847*** - import penetration coefficient 0.032*** - forward link coefficient -0.474** - backward link coefficient 0.002 - Construction: - lagged labor share 0.728*** - relative price of investment goods 0.025** - unemployment benefits 0.016** - Agriculture: - temporary contracts -0.014*** - relative price of investment goods 0.004** - Trade: - temporary contracts -0.098*** - relative price of investment goods -0.031** - IT / Professional services: - productivity a dominant positive contributor; forward link positive in professional/publishing - Skill-level regression results and explanatory power: - High-skilled: - lagged labor share 0.705*** - model R-squared 0.824 - contributions from productivity and cyclical convergence - Mid-skilled: - lagged labor share 0.631*** - temporary contracts -0.106** - forward link -2.316* - model R-squared 0.712 - Low-skilled: - lagged labor share 0.445*** - part-time share 0.318*** (positive in low-skill regression) - import penetration -0.072* - model R-squared 0.620 - Empirical magnitudes: - Labor share decline for low- to mid-skilled workers often 2–5 percentage points on average; mid-skilled losses up to 8 percentage points in worst cases. ### Methodology and data notes - Definition: sector/skill labor share defined as total labor compensation paid to workers in that category as a share of total GDP divided by the employment share of the given category (skill-level data limited to full-time employment). - Estimation: cross-country panel regressions with a lagged dependent variable and controls for cyclical factors (unemployment gap, involuntary part-time work, EU GDP gap), structural factors (self-employment share, part-time share, temporary share, relative price of investment goods, import penetration, unionization rate, unemployment benefits, employment protection, forward/backward GVC links). - Time coverage constraints: many structural indicators available only from 2002, so long-term changes measured between 2000 and 2016 where applicable; skill-category data latest year 2014. ### Policy implications and recommendations - Broad policy directions: - Support worker complementarities with technology via on-the-job training and lifelong education to reduce displacement risk from automation and globalization. - Reform social insurance and labor market protections to reflect changing employment formats: - Extend employment protection and unemployment benefits coverage to part-time and self-employed workers while facilitating transitions across jobs. - For NMS: manage economic deepening and GVC integration to avoid lock-in in low value-added, low-skilled segments and strengthen channels for technological transfer. - Distributional emphasis: - Address the disproportionate erosion experienced by low- and mid-skilled workers (labor share declines up to 5 and 8 percentage points respectively) to limit rising inequality and consumption drag. - Sectoral focus: - Recognize that services and high-skilled sectors experienced labor share gains (about 1–2 percentage points from productivity and flexibility), so policy should balance support for evolving high-skilled sectors with targeted measures for adversely affected goods-producing and routinizable sectors. ### Appendix: Data description (selected variables and categories) - Key variables and data sources: - Labor share: Ratio of total labor compensation to national vallue added divided by employment share — Eurostat/Haver - Unemployment gap: Percent deviation from eqilbrium unemployment rate — Eurostat - Real producivity: Real labor productivity per hour — Eurostat - Involuntary part-time employment: Share of involuntary part-time workers of total employment — Eurostat - Self-employment share: Self-employment share of total employment — Eurostat - Part-time employment: Part-time employment share of total employment — Eurostat - Temporary contracts: Temporary contracts, thousands — Eurostat - Relative price of investment goods: Total GFCF deflator/final consumption expenditure deflator — Eurostat/Haver - Import pentation: Import penetration of emerging and developing economies — WEO - Union penetration: Trade union density rate as percent of paid employment — OECD - Unemployment benefits: Average net replacement rate over 60 months of unemployment — OECD - Employment share: Strictness of individual and collective dismissals — OECD - Forward link: Foreign value-added exports share of global value-added in GVC — OECD - Backward link: Reexported value-added share of global value-added in GVC — OECD - Sector categories (selected): - Total economy; Industry; Manufacturing; Construction; Agriculture; Finance and insurance; Information and commucation; Trade, travel and food services; Arts and creative srvices; Public adminsitration; IT and professional services; Real estate - Skill categories (codes and mapping): - OC1 Managers — High - OC2 Professionals, OC3 Technicians and associate professionals, OC4 Clerical support workers — Medium - OC5 Service and sales workers, OC6 Skilled agricultural, forestry and fishery workers, OC7 Craft and related trades workers, OC8 Plant and machine operators and assemblers, OC9 Elementary occupations — Low *Source: wpiea2019067 (IMF staff calculations, Eurostat, Haver Analytics; content as provided).* ### 1. The Labor Share in the EU ____________________________________________________________ 5 ### 1. The Labor Share in the EU ### Major sections and themes (as listed in the source) - 1. The Labor Share in the EU ____________________________________________________________ 5 - 2. Evolution of Labor Share by Skill Category ______________________________________________ 10 - 3. Evolution of Labor Share in Goods Producing Industries ___________________________________ 11 - 4. Evolution of Labor Share in Service Industries ___________________________________________ 11 - 5. Shift Share Analysis by Industry and Skill Category _______________________________________ 13 - 6. The Evolution of Labor Market Factors _________________________________________________ 15 - 7. The Evolution of Goods Market Factors _________________________________________________ 16 - 8. Contribution of Structural Factors to Labor Share Changes in Manufacturing Sectors _____________ 24 - 9. Contribution of Structural Factors to Labor Share Changes in Agriculture and Trade Industries _____________________________________________________________________ 25 - 10. Contribution of Structural Factors to Labor Share Changes in Services Industries ___________________________________________________________________________ 26 - 11. Contribution of Structural Factors to Labor Share Changes by Skill Category __________________ 33 ### Tables (listed) - TABLES - 1. Structural Factors Contribution in Manufacturing Sectors ___________________________________ 29 - 2. Structural Factors Contribution in Agriculture and Trade Sectors _____________________________ 30 - 3. Structural Factors Contribution in Service Sectors _________________________________________ 31 - 4. Structural Factors Contribution by Skill Category _________________________________________ 34 ### Appendices and supplementary material - APPENDICES - I. Data Description ___________________________________________________________________ 40 ### References - REFERENCES *Source: wpiea2019067 - 1. The Labor Share in the EU (IMF PDF table of contents)* ### References __________________________________________________________________________ 37 ### wpiea2019067 - References ### Introduction and scope - Focus: evolution of the labor share (ratio of labor compensation to national income) across 28 EU countries, by industry (11 sectors) and by skill category (three skill groups), covering primarily 2002–2016 (sectoral up to 2016, skill categories up to 2014). - Approach: shift-share analysis and cross-country panel regressions linking labor share changes to structural factors (employment structure, labor market policies, goods market structure) and cyclical controls. - Countries: 17 Advanced Economies (AE) listed and 11 New Member States (NMS) listed in the source; panel includes 28 EU countries where complete data available. ### Major trends (high-level findings) - Aggregate and distributional trends: - Labor share has been on a downward trend in the EU in the last couple of decades; the trend began around 2012–13 after the Great Recession. - Low-skilled jobs: labor share fell by 1.7 percentage points (linear trend, 2002–14). - Mid-skilled jobs: labor share fell by 1.9 percentage points (linear trend, 2002–14). - High-skilled occupations: labor share increased by 2 percentage points on average (2002–14). - Declines concentrated in goods-producing industries; services generally held or gained labor share. - Within-sector/skill-category changes account for the majority of labor share fluctuations; between-industry reallocation explains only 17 percentage points on average, and between-skill reallocation 22 percentage points on average. - Notable country and sector extremes: - Greece and Malta: low-skilled labor share declined by 5 percentage points; Croatia declined by 4 percentage points. - Mid-skilled declines were 4–8 percentage points in Austria, Luxembourg, Slovakia and Romania. - Manufacturing labor share shrank by up to 3 percentage points in Finland and Malta (sectoral linear trend). - Construction labor share declined by 2.5 percentage points in Ireland and Spain (sectoral linear trend). - Greece: between-industry reallocation accounted for one-third of labor share change in that case. - Ireland: large within-industry labor share loss partly offset by between-sector reallocation. ### Structural drivers — empirical contributions - Employment structure indicators: - Rise in part-time employment and in temporary contracts are among the main contributors to lower labor share in almost all countries and sectors. - A rise in temporary contracts is responsible for up to 3 percentage points decline in the labor share in some countries (Poland highlighted). - The fall in self-employment partly offset labor share declines because self-employment share largely decreased in many EU economies. - Labor market policies: - Declines in unemployment benefits, declines in unionization, and erosion of employment protection together contributed up to 1 percentage point loss in several sectors and in countries with shrinking labor share (examples: Germany and the Netherlands). - Unionization rate dropped in all EU economies except Italy and Spain. - Goods market and technology: - Technology (proxied by the relative price of investment goods) depressed labor share selectively — notably in routinizable sectors such as trade and travel — but raised productivity and labor share for specialized workers in agriculture, construction, and professional services in some countries. - Import penetration (globalization) raised labor share in some transitional (NMS) economies where domestic wages were relatively low, but contributed to declines in some AE manufacturing sectors. - Global value chains: forward and backward link changes had mixed and generally smaller correlations with labor share; forward link expected to be positive for domestic labor share while backward link expected to be negative, with empirical heterogeneity. ### Sectoral and skill-specific results (selected quantitative highlights) - Sectoral (results from fixed-effects regressions; selected coefficients from tables): - Total economy: lagged labor share coefficient 0.798***; self-employment share coefficient -0.234**; temporary contracts coefficient -0.250*; unemployment benefits coefficient 0.034**; employment protection coefficient 0.729**. - Manufacture: lagged labor share 0.847***; import penetration coefficient 0.032***; forward link coefficient -0.474**; backward link coefficient 0.002 (see Table 1). - Construction: lagged labor share 0.728***; relative price of investment goods 0.025** (positive); unemployment benefits 0.016** (see Table 1). - Agriculture: temporary contracts -0.014***; relative price of investment goods 0.004** (positive) (see Table 2). - Trade: temporary contracts -0.098***; relative price of investment goods -0.031** (negative) (see Table 2). - IT / Professional services: productivity a dominant positive contributor; forward link positive in professional/publishing (see Table 3). - Skill-level (selected coefficients and explanatory power; Table 4): - High-skilled: lagged labor share 0.705***; contribution from productivity and cyclical convergence; model R-squared 0.824 for high-skill. - Mid-skilled: lagged labor share 0.631***; temporary contracts -0.106**; forward link -2.316* (skill-hollowing effect); model R-squared 0.712. - Low-skilled: lagged labor share 0.445***; part-time share 0.318*** (positive in low-skill regression), import penetration -0.072*; model R-squared 0.620. - Empirical magnitudes: labor share decline for low- to mid-skilled workers often 2–5 percentage points on average; mid-skilled losses up to 8 percentage points in worst cases. ### Methodology and data notes - Definition: sector/skill labor share defined as total labor compensation paid to workers in that category as a share of total GDP divided by the employment share of the given category (skill-level data limited to full-time employment). - Estimation: cross-country panel regressions with a lagged dependent variable and controls for cyclical factors (unemployment gap, involuntary part-time work, EU GDP gap), structural factors (self-employment share, part-time share, temporary share, relative price of investment goods, import penetration, unionization rate, unemployment benefits, employment protection, forward/backward GVC links). - Time coverage constraints: many structural indicators available only from 2002, so long-term changes measured between 2000 and 2016 where applicable; skill-category data latest year 2014. ### Policy implications and recommendations - Broad policy directions: - Support worker complementarities with technology via on-the-job training and lifelong education to reduce displacement risk from automation and globalization. - Reform social insurance and labor market protections to reflect changing employment formats: - Extend employment protection and unemployment benefits coverage to part-time and self-employed workers while facilitating transitions across jobs. - For NMS: manage economic deepening and GVC integration to avoid lock-in in low value-added, low-skilled segments and strengthen channels for technological transfer. - Distributional emphasis: - Address the disproportionate erosion experienced by low- and mid-skilled workers (labor share declines up to 5 and 8 percentage points respectively) to limit rising inequality and consumption drag. - Sectoral focus: - Recognize that services and high-skilled sectors experienced labor share gains (about 1–2 percentage points from productivity and flexibility), so policy should balance support for evolving high-skilled sectors with targeted measures for adversely affected goods-producing and routinizable sectors. *Italicized source: wpiea2019067 - References (IMF staff calculations, Eurostat, Haver Analytics; content as provided).* ### REFERENCES ### REFERENCES ### Bibliographic references - Abdih, Yasser Stephan Danninger (2017). “What Explains the Decline of the U.S. Labor Share of Income? An Analysis of State and Industry Level Data,” IMF Working Paper No. WP/17/167. - Acemoglu, Daron and Pascual Restrepo (2016). “The Race Between Machine and Man: Implications of Technology for Growth, Factor Shares and Employment,” NBER Working Paper No. 22252. - Arpaia, Alfonso, Esther Perez, and Karl Pichelmann (2009) “Understanding Labour Income Share Dynamics in Europe,” European Commission Economic Papers 379. - Autor, David, David Dorn, Lawrence Katz, Christina Patterson and John van Reenen (2017). “Concentrating on the Fall of the Labor Share,” CEPR Discussion Papers 11810. - Autor, David, David Dorn, Lawrence F. Katz, Christina Patterson and John van Reenen (2017). “The Fall of the Labor Share and the Rise of Superstar Firms,” NBER Working Paper No. 23396. - Blanchard, Olivier (1997) “The Medium Run,” Brookings Papers on Economic Activity, (2), pp. 89–158. - Ciminelli, Gabriele, Romain A Duval and Davide Furceri (2018). “Employment Protection Deregulation and Labor Shares in Advanced Economies,” IMF Working paper 18/186. - De Serres, Alain, Stefano Scarpetta, and Christine de la Maisonneuve (2002). “Sectoral Shifts in Europe and the United States: How They Affect Aggregate Labour Shares and the Properties of Wage Equations,” OECD Economics Department Working Papers 326. - De Loecker, Jan and Jan Eeckhout (2017). “The Rise of Market Power and the Macroeconomic Implications,” NBER Working Paper No. 23687. - Deakin, Simon, Jonas Malmberg and Prabirjit Sarkar (2014). “How Do Labor Laws Affect Unemployment and The Labor Share of National Income? The Experience of Six OECD Countries, 1970–2010,” International Labour Review, 153 (1). - Elsby, Michael, Bart Hobijn and Ayseful Sahin (2013). “The Decline of the U.S. Labor Share,” Brookings Papers on Economic Activity, 44(2), pp. 1-63. - European Commission (2007). “The Labour Income Share in the European Union,” Employment in Europe. - Fichtenbaum, Rudi (2011). “Do Unions Affect Labor's Share of Income: Evidence Using Panel Data,” American Journal of Economics and Sociology, 70 (3), pp. 784-810. - Gomme, Paul and Jeremy Greenwood (1995). “On the Cyclical Allocation of Risk,” Journal of Economic Dynamics and Control, 19 (1-2), pp. 91–124. - Gomme, Paul and Peter Rupert (2004). “Measuring Labor’s Share of Income,” Federal Reserve Bank of Cleveland Policy Discussion Paper 7. - Grossman, Gene, Elhanan Helpman, Ezra Oberfield and Thomas Sampson (2017). “The Productivity Slowdown and the Declining Labor Share: A Neoclassical Exploration,” CEP Discussion Papers dp1504. - Guscina, Anastasia (2007). “Effects of Globalization on Labor’s Share in National Income,” IMF Working Papers 06/294. - Harrison, Anne (2002). “Has Globalization Eroded Labor’s Share? Some Cross-Country Evidence,” mimeo. - Houngbonon, Georges Vivien and Pascal Da-Costa (2017). “Declining Labor Share and Innovation,” Working Papers hal-01653816. - Jaumotte, Florence and Irina Tytell (2008). “How has the Globalization of Labor Affected the Labor Income Share in Advanced Countries?” IMF Working Papers 07/298. - Jayadev, Arjun (2007). “Capital Account Openness and the Labour Share of Income,” Cambridge Journal of Economics, 31 (3), p. 423. - Karabarbounis, Loukas and Brent Neiman (2013). “The Global Decline of the Labor Share.” Quarterly Journal of Economics, 129(1), pp. 61-103. - Koutentakis, Franciscos (2008). “The Effect of Temporary Contracts on Job Security of Permanent Workers,” Economics Letters, vol. 101, iss. 3, pp. 220-222. - Krueger, Alan (1999). “Measuring Labor’s Share,” The American Economic Review, 89 (2), pp. 45–51. - Lawless, Martina and Karl Whelan (2011). “Understanding the Dynamics of Labor Shares and Inflation,” Journal of Macroeconomics, 33 (2), pp. 121 – 136. - McKenzie, Richard and David Brackfield (2008) “The OECD System of Unit Labour Cost and Related Indicators,” OECD Statistics Working Papers 4. - OECD (2009). “Compensation of Employees,” National Accounts at a Glance. - Pissarides, Christopher (2000). Equilibrium Unemployment Theory, MIT press. - Reicher, Christopher (2011) “Matching Labor’s Share in a Search and Matching Framework,” Kiel Working Paper, Technical Report 1733. - Rios-Rull, Jose-Victor and Raul Santaeulalia-Llopis (2010) “Redistributive Shocks and Productivity Shocks,” Journal of Monetary Economics, 57 (8), pp. 931 – 948. - Rodriguez, Francisco and Arjun Jayadev (2010). “The Declining Labor Share of Income,” Human Development Research Papers HDRP-2010-36. - Ruiz, Carmen Garrido (2005). “Are Factor Shares Constant? An Empirical Assessment from a New Perspective,” mimeo. - Schneider, Dorothee (2011a). “Monitoring, Information Technology and the Labor Share,” Humboldt University Discussion Papers SFB649. - Schneider, Dorothee (2011b). “Bargaining, Openness, and the Labor Share,” Humboldt University Discussion PapersSFB649. - Timmer, Marcel, Ton van Moergastel, Edwin Stuivenwold, Gerard Ypma, Mary O’Mahony, and Mari Kangasniemi (2007). “EU KLEMS Growth and Productivity Accounts: Version 1.0 - Part I: Methodology,” EU KLEMS. ### Page markers - 38 - 39 - 40 ### APPENDIX I. DATA DESCRIPTION ### Table A.1. List of Variables with Sources and Descriptions - VARIABLES CALCULATION Source - Labor share Ratio of total labor compensation to national vallue added divided by employment share Eurostat/Haver - Unemployment gap Percent deviation from eqilbrium unemployment rate Eurostat - Real producivity Real labor productivity per hour Eurostat - Involuntary part-time employment Share of involuntary part-time workers of total employment Eurostat - Self-employment share Self-employment share of total employment Eurostat - Part-time employment Part-time employment share of total employment Eurostat - Temporary contracts Temporary contracts, thousands Eurostat - Relative price of investment goods Total GFCF deflator/final consumption expenditure deflator Eurostat/Haver - Import pentation Import penetration of emerging and developing economies WEO - Union penetration Trade union density rate as percent of paid employment OECD - Unemployment benefits Average net replacement rate over 60 months of unemployment OECD - Employment share Strictness of individual and collective dismissals OECD - Forward link Foreign value-added exports share of global value-added in GVC OECD - Backward link Reexported value-added share of global value-added in GVC OECD ### Table A.2. Sector Categories - NAME DEFINITION - Total economy Total economy - Industry Industry excluding construction - Manufacturing Manufacturing - Construction Construction - Agriculture Agriculture, forestry and fishing - Finance and insurance Finance and insurance - Information and commucation Information and commucation - Trade, travel and food services Trade, travel and food services - Arts and creative srvices Art, creation and other services - Public adminsitration Public administration, education, social work - IT and professional services Professional services, technology and administration - Real estate Real estate ### Table A.3. Skill Categories - CODE DEFINITION SKILL - OC1 Managers High - OC2 Professionals OC3 Technicians and associate professionals OC4 Clerical support workers Medium - OC5 Service and sales workers OC6 Skilled agricultural, forestry and fishery workers OC7 Craft and related trades workers OC8 Plant and machine operators and assemblers Low - OC9 Elementary occupations *Source: wpiea2019067 - REFERENCES* --- _Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019067.pdf_