Do Flexibility Measures Affect the Wage Share? An Empirical Analysis of Selected European Countries

ABSTRACT

Since the beginning of the 1980s, reforms of the labour market have been at the centre of political and economic debate in the European Union. While these reforms were implemented mainly with the aim of improving employment performance by removing structural issues, they may also have had non-secondary and non-negligible effects on the share of national income received by workers. The aim of this paper is to study the effects of the changes in the labour market regulation index (LMRI) on the wage share in twelve Eurozone countries between 2000 and 2019. The empirical results — obtained from the estimation of an error correction model (ECM) — show that: (i) an inverse relation exists between LMRI as a whole and adjusted wage share in the short run only; (ii) the reduction of the adjusted wage share depends mainly on two specific measures of flexibility: a more decentralized level of bargaining (the effects of which are significant in both long- and short-run periods) and a relaxation of the hiring and firing regulations (the effects of which are significant only in the short run); (iii) the economic growth and unemployment rate also contribute to the decline of the adjusted wage share.

KEYWORDS:

• Labour market policies
• wage share
• Eurozone countries
• panel data

JEL CODES:

• J38
• J31
• O52
• C23

Acknowledgements

We would like to use this opportunity to acknowledge and thank the reviewers who reviewed this article and aided in its publication.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 More specifically, while eleven countries adhered in 1999 (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain), Greece met the requirements in 2001.

2 https://dashboard.tech.ec.europa.eu/qs_digit_dashboard_mt/public/sense/app/667e9fba-eea7-4d17-abf0-ef20f6994336/sheet/2f9f3ab7-09e9-4665-92d1-de9ead91fac7/state/analysis. According to AMECO, the adjusted wage share (AWS) is the compensation per employee as a percentage of GDP at market prices per person employed.

3 https://www.fraserinstitute.org/economic-freedom/dataset?geozone=world&year=2019&page=dataset&min-year=2&max-year=0&filter=0.

4 Table A in the appendix provides descriptive statistics about the values and changes of the adjusted wage share and LMRI for each individual country in the dataset.

5 Pesaran's test of cross-sectional independence = 3.706, Pr = 0.0002. Therefore, according to this test the hypothesis of no cross-sectional dependence is rejected.

6 It is very important to highlight that some countries — mainly peripheral ones — have also continued to make their labour markets more flexible in the period 2013–2019.