Market Power, Productivity and Sectoral Labour Shares in Europe

The stability of the labour share of income is a fundamental feature of many macroeconomic models. Empirically however, the labour share varies considerably across countries and across sectors within countries. In addition, gradual declines in the labour share have been documented in many countries leading to much debate on the causes of the reduction. This paper examines several of the potential drivers of variation in the labour share across countries and sectors in Europe. Beginning with a simple shift-share analysis, we demonstrate that observed changes has been primarily driven by changes within rather than between sectors. We then use aggregated microdata to investigate the strength of correlation between sectoral distributions of labour shares and measures of productivity and market power. Our main findings are that the advance of globalisation and a widening productivity gap from the rise of “superstar firms” are negatively related to the labour share, and that this negative relationship is stronger for the reallocation margin within sectors compared to its link to between sector reallocation.