THE GREAT FALL OF LABOR SHARE: MICRO DETERMINANTS FOR EU COUNTRIES OVER 2011-2019

The worldwide fall of labor shares in recent decades is well documented, but its underlying sources remain still unclear. Most of the recent empirical analysis rely on industry or aggregate macro data, downplaying the importance of heterogeneity among firms. In this paper we analyze micro panel data from Amadeus and seek to understand the dynamics of labor share in 19 sectors of the EU28. In our model firms are heterogeneous in capital stock, market power and technology. Labor share’s changes turn out to be driven by the complex interplay among these factors. We show that its slowdown in recent years reflects changes in capital deepening, technology progress and capital-labor substitution. Although institutional factors play a significant role in specific industries, they appear to be less relevant, than is usually believed, for the aggregate economy. Specifically, non-linear terms for the capital-output ratio make the effect of capital accumulation on the labor share no longer trivial, explaining the observed heterogeneous behavior within industries.