European Labor Share Dynamics: An Institutional Perspective

This paper studies the evolution of the labour share in the EU countries and the US for the period 1960 to 1998. Counter-cyclical movements of the labour share predicted by a dynamic labour demand model with dismissal costs characterise the data. Moreover, there is evidence suggesting that the tighter employment protection legislation in a given country, the higher the variation in the labour share for similar fluctuations in business conditions. An equilibrium relationship between the labour share and a measure of business cyclefluctuations seems to hold during the first two decades of the period studied. In most countries under study, however, we find downward shifts of the equilibrium schedule occurring primarily in the first part of the 1980s. In our interpretation, these shifts probably reflect the sharp reduction in union power that isdocumented for most European countries during this period.