Recent trends in the labour share
The labour share is a variable with important economic, political and social implications which is of particular interest to analyse in turbulent times like the present.
In the last three years we have witnessed the outbreak of a pandemic and of war between Russia and Ukraine. Against this turbulent backdrop, it is worth reviewing the recent pattern in the labour share, as this is a key variable which is linked to inequality, competitiveness, technological change and other structural dynamics.1
The labour share ratio, usually measured using employee wage data from the quarterly national accounts, typically follows a counter-cyclical pattern. That is, it increases during periods of recession and decreases in expansionary phases. This behaviour is largely due to the fact that, during a crisis, businesses prefer to retain their workers insofar as possible in order to avoid the costs associated with finding employees who fit the required profile when the economy eventually emerges from the crisis. This correlation has tended to be less pronounced in Spain compared to other developed countries, due to the traditionally strong duality of the labour market, which has been reflected in a greater propensity among firms to lay off workers when a recession hits.
In the first chart, we can compare how the labour share has varied with the onset of the Global Financial Crisis (GFC) in 2008 and since the outbreak of the pandemic in 2020. As mentioned earlier, the counter-cyclical pattern of the labour share is clear in both crises. However, it is also apparent that the pattern was far more pronounced during the pandemic than during the GFC. During the pandemic, the labour share increased by 5 pps compared to its pre-crisis level (Q4 2019) and for much of 2020 and 2021 it remained around 3 pps higher. Indeed, according to the latest data for Q3 2022, this ratio still lies around 1 pp higher. In contrast, during the GFC the ratio barely increased by 1 pp at its peak.
- 1. For many years, the academic economic literature has analysed the steady fall in the labour share. See the Dossier «Labour income share in perspective» in the MR02/2014.
This more pronounced counter-cyclical pattern during the pandemic is undoubtedly related to the measures implemented during 2020 to protect household incomes. In particular, the introduction of the ERTE furlough schemes allowed more than three million workers to stop working (either entirely or partially) without losing their jobs. As such, their wages were not as affected as they would have been had they been fired and, moreover, they were able to return to employment much faster.
These economic policies, which have had an impact on the cyclical behaviour of the labour share, have also been reflected in the way in which the drop in economic activity was distributed among the labour force. The second chart shows the breakdown of the growth in employee compensation into three factors: remuneration per hour worked (wages), hours worked per employee (intensive margin) and the number of employees (extensive margin).
As can be seen in 2020, and in particular in Q2 of that year, the fall observed in the compensation of employees was largely due to a drop in the number of hours worked per employee (intensive margin), while the contribution of the fall in the number of employees (extensive margin) was much smaller. The fall in employee compensation in 2020 is consistent with the increase in the labour share which we saw in the first chart. That is, the labour share increased because labour incomes fell to a lesser extent than GDP as a whole.2
Also, in Q2 2021, the quarter which saw a significant reopening of the economy, it was once again the intensive margin which drove the recovery in employee compensation. This was thanks to the fact that the ERTE furlough schemes allowed the workers affected by such schemes to quickly return to work.
Finally, the chart also shows that, since Q3 2021, wage growth has stabilised and has become clearly more driven by job growth (extensive margin).
The role of the intensive margin in explaining wage fluctuations stands in stark contrast with the experience during the GFC. As the last chart shows, during the GFC it was the extensive margin, rather than the intensive one, that explained most of the fluctuation in the employee compensation.
- 2. For instance, in Q2 2020 the compensation of employees fell by 12.2% while GDP dropped by 21%.
In short, in this article we have seen how the labour share increased during the pandemic to a greater extent than was usually the case in the past. This more counter-cyclical behaviour has its origins in the structural changes in the Spanish labour market. In particular, the ERTE furlough schemes allowed the labour market to adjust by reducing the number of hours worked per employee rather than resorting to mass lay-offs. As such, the impact of the crisis has been distributed among workers more evenly, rather than being concentrated in the group of workers who lost their jobs.3
- 3. The article «Wage inequality in Spain returns to the pre-pandemic levels» in the MR07/2022 shows how inequality in Spain recovered pre-crisis levels during the pandemic much more quickly than following the global financial crisis. Again, the differential behaviour of the labour market during the pandemic is one of the key factors behind this outcome.