Macroeconomic Determinants of the Labour Share of Income: Evidence from OECD Economies

• Main Authors: Trofimov, Ivan D., Nazaria, Md. Aris, Muhammad K. F, Rosli
• Format: Working Paper
• Language: English
• Published: Kolej Yayasan Saad & UNIMAS 2018
• Subjects: H Social Sciences (General); HB Economic Theory; HG Finance
• Online Access: http://ir.unimas.my/id/eprint/33187/1/Nazaria.pdf; http://ir.unimas.my/id/eprint/33187/; https://mpra.ub.uni-muenchen.de/85597/

The study investigates the relationships between the labour share of income and several macroeconomic variables – the GDP growth, inflation, unemployment, as well as GDP gap and capacity utilization – in industrialised economies between 1960 and the 2010s. Three complementary hypotheses that relate macroeconomic determinants to the labour share dynamics are considered: 'overhead labour' hypothesis, 'realization theory/wage lag' hypothesis and the 'rising strength of labour' hypothesis. The study employs a sequential procedure: testing for the stationarity properties of the variables, using bounds test to identify the presence of cointegrating relationships, and estimating long-run relationships using ARDL or OLS methods. The results show that all three hypotheses are supported only in a limited number of economies, whilst in the majority of cases only certain relationships are prominent. On the whole, the GDP growth rate, the unemployment rate, and to a smaller extent capacity are found to be the principal determinants of the labour share, while change in the level of prices is of subsidiary importance. Keywords: labour share; time series; macroeconomic determinants