Inequality and Employment Sensitivities to the Falling Labour Share

Marika Karanassou, Hector Sala


This paper examines whether the labour share (wage-productivity gap) is a major factor in the evolution of inequality and employment. To this end, we use annual data for the US, UK and Sweden over the past forty years and estimate country-specific systems of labour demand and Gini coefficient equations. Further to the statistical significance of our models, we validate their economic significance through counterfactual simulations. In particular, we evaluate the contributions of the labour share to the trajectories of inequality and employment during specific time intervals in the post-1990 years. We find that during the 1990s the cost of a one per cent increase in employment was in the range of 0.7 per cent-0.9 per cent higher inequality in all three countries. However, in the 2000s, whereas the inequality-employment sensitivity ratio slightly fell
in the US, it exceeded unity in the countries on the other side of the Atlantic. It obtained its highest value in the UK, where a 1 per cent growth in employment was achieved at the expense
of 1.3 per cent worsening in income inequality. We argue that the inequality-employment sensitivity ratio can be viewed as a barometer of socio-economic pressure, and thus the evolution of the wage-productivity gap and its impacts on the personal income distribution and labour demand deserve the attention of policy makers.

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