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Theoretical and Applied Economics
No. 3 / 2018 (616), Autumn

Macroeconomic determinants of the labour share of income: Evidence from OECD economies

Kolej Yayasan Saad (KYS) Business School, Malaysia
Nazaria Md. ARIS
University of Malaysia, Sarawak, Malaysia
Muhammad Khairil Firdaus Bin ROSLI
University of Malaysia, Sarawak, Malaysia

Abstract. The study investigates the relationships between the labour share of income and several macroeconomic variables – the GDP growth, inflation, unemployment, as well as GDP gap and capacity utilization – in industrialised economies between 1960 and the 2010s. Three complementary hypotheses that relate macroeconomic determinants to the labour share dynamics are considered: 'overhead labour' hypothesis, 'realization theory/wage lag' hypothesis and the 'rising strength of labour' hypothesis. The study employs a sequential procedure: testing for the stationarity properties of the variables, using bounds test to identify the presence of cointegrating relationships, and estimating long-run relationships using ARDL or OLS methods. The results show that all three hypotheses are supported only in a limited number of economies, whilst in the majority of cases only certain relationships are prominent. On the whole, the GDP growth rate, the unemployment rate, and to a smaller extent capacity are found to be the principal determinants of the labour share, while change in the level of prices is of subsidiary importance.

Keywords: labour share; time series; macroeconomic determinants.

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