Stability of Labour Shares: Evidence from OECD Economies

In light of ongoing concern about rising inequality in developed economies, this paper revisits the old standing issue of the stability of labour shares. The paper focuses specifically on the empirical aspects of the problem and considers statistical properties of the labour shares in OECD economies in the 1960-2014 period, using a battery of time series models and unit root tests. We account for structural changes in labour shares using Lagrange Multiplier (LM) unit root tests with up to two structural breaks, address the problem of heterogeneous level shifts using LM panel unit root tests, and examine four types of statistical patterns (trend stationarity, mean reversion, random walk with and without drift) using the Augmented Dickey-Fuller (ADF) test. Empirical results indicate diverse patterns in labour share movements, the most preponderant being a downward deterministic trend with break(s). Upward trends are observed in a limited set of economies (Belgium, Luxembourg and the Netherlands). Overall, the stability of the labour share hypothesis appears to find only weak support. Exploratory analysis demonstrates that most of the structural breaks are economically significant and relate to the recent economic and political history of individual economies. The nature of labour share dynamics, as a country-specific and (to a large extent) policy and political phenomenon, is emphasized.