Labour share convergence in the European Union

Prohorovs, Anatolijs; Bistrova, Julija Article Labour share convergence in the European Union Economies Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Prohorovs, Anatolijs; Bistrova, Julija (2022) : Labour share convergence in the European Union, Economies, ISSN 2227-7099, MDPI, Basel, Vol. 10, Iss. 9, pp. 1-21, https://doi.org/10.3390/economies10090207 This Version is available at: https://hdl.handle.net/10419/328507 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Economies 10: 207. https://doi.org/ 10.3390/economies10090207 Received: 23 June 2022 Accepted: 25 August 2022 Published: 29 August 2022 Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. Copyright: © 2022 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). economies Article Labour Share Convergence in the European Union Anatolijs Prohorovs 1and Julija Bistrova 2,* 1Faculty of Business and Economics, Economics and Finance Department, RISEBA University of Applied Sciences, 3 Meža Street, LV-1048 Riga, Latvia 2Faculty of Engineering Economics and Management, Department of Corporate Finance and Economics, Riga Technical University, 6 Kalnciema Street, LV-1048 Riga, Latvia *Correspondence: julija.bistr[email protected] Abstract: The article examines the issue of labour share convergence between Western Europe (EU15) and Central and Eastern Europe (EU11). The results of our research show that for the period of 2009–2018, the convergence of labour share between the EU11 and the EU15 at the aggregate level was almost 40%. At the sectoral level, convergence of labour share between the EU11 and the EU15 occurred in three of the four main sectors—manufacturing, services, and construction—while there was a divergence in the trade sector. At the sectoral level, the highest level of convergence occurred in manufacturing—over 89.7%. In the service sector, the convergence of labour share was almost 45%, but this was mainly due to the fact that in the information and communication industry, the convergence was almost 87.8%. We have determined that for a number of sectors and industries there is an inverse relationship between the level of labour share and its dynamics, which influences the convergence of labour share between the EU11 and the EU15. We also determined that during the period under review, the level of convergence of labour share between the EU11 and the EU15 was five times higher than the level of convergence of the economy and ascertained the main reasons for the labour share convergence being higher than the economy convergence. Keywords: labour share convergence; personnel cost; Central and Eastern Europe; Western Europe JEL Classification: J30; J31; R11 1. Introduction Labour share is an important indicator, as a long-term decline in labour share, even with improved macroeconomic performance, may not lead to a commensurate improvement in household income (Atkinson 2009), and in many countries a low labour share in the functional distribution of income is associated with higher levels of inequality (Piketty 2013). Convergence has always been considered a fundamental economic mechanism and a prerequisite for achieving socioeconomic cohesion in the EU (Alcidi 2019). The accession to the European Union (EU) of the countries of Central and Eastern Europe (CEE) contributed to the acceleration of the growth of their economies due, inter alia, to access to the single market for goods and financing from EU structural funds, which contributed in turn to the convergence of the economies of the EU11 and EU15 countries (European Commission 2009;Cuestas et al. 2012;Czasonis and Quinn 2012). Accordingly, there were certain prerequisites for the convergence of the labour share between the EU11 and EU15 countries. For example, in a number of Western European (WE) countries, there was a decrease in labour share (Berger and Wolf 2017;Cette et al. 2019), and in some EU11 countries, especially those with relatively low levels of labour share, there was an increase in labour share (Archanskaia et al. 2019). Despite the fact that labour share is an indicator of important macroeconomic trends (OECD 2015;Takeuchi 2018;International Labour Office 2019) that also characterizes the Economies 2022,10, 207. https://doi.org/10.3390/economies10090207 https://www.mdpi.com/journal/economies Economies 2022,10, 207 2 of 21 effectiveness of EU integration policy, the existing literature is poor in research on labour share convergence in the EU. In a study by Giovannoni (2010), the presence of convergence of labour share between WE and CEE countries was indicated. However, the data from this study ends in 2004, when the first CEE countries joined the EU. A recent study by Archanskaia et al. (2019) finds that there is some evidence of cross-country convergence in the euro area, and their analysis also underpins weak convergence in labour shares across the euro area. The data of this study also include a significant period of time when the CEE countries were not yet part of the EU; that is, the study does not group countries on any basis and is also based only on aggregate data. In addition, only five of the EU11 countries (European Commission 2022) are members of the Eurozone, and all of these countries have small populations and small economies. Therefore, the question has remained open until now whether there has been a convergence of labour share between the CEE countries that joined the EU and the WE countries that were members of the EU before 2004. There are also two issues not considered in the literature related to the convergence of labour share between the EU11 and the EU15. First, the lack of data on labour share convergence made it impossible to compare the levels of labour share convergence and the convergence of the economy as a whole between the EU11 and the EU15. Secondly, the contribution or influence of specific sectors on labour share convergence is not discussed. The design of our study, which classifies countries into two groups, will allow us to determine the general trends in the dynamics and convergence of labour share for each group of countries, including at the level of sectors and industries of the service sector, and, to some extent, to determine the impact of the entry of CEE countries into the EU on labour share convergence. Therefore, we intend to test the assumption of labour share convergence between Western European and Central and Eastern European countries during the period of 2009– 2018. For the first time, the level of convergence of labour share between the EU11 and the EU15 was calculated. This allowed us to determine that the convergence of labour share occurred at a much faster rate than the convergence of the economy and to argue for some reasons for the faster growth of convergence of labour share between the EU11 and the EU15. Our findings have clear practical, empirical and political implications. On a practical level, we have presented for the first time data on convergence of labour share between the EU11 and the EU15 at the aggregate, sectoral and service industries level. We also found new trends in the dynamics of labour share in the service sector, demonstrated that the level of convergence of labour share is five times higher than the level of convergence of the economy between the EU11 and the EU15, and determined the main reasons for the higher level of convergence of labour share. Our main empirical contribution is that we determined that in a number of sectors and industries there is an inverse relationship between the level of labour share and its dynamics. We showed that when developing a methodology for researching labour share trends, in order to avoid erroneous conclusions, it is necessary to consider not only aggregate data and data at the sector level, but also data at the industry level. At the political level, the data we have presented are important for assessing the effectiveness of the economic integration of the CEE countries admitted to the EU. The data presented can also be used to discuss the feasibility of applying new political and economic initiatives aimed at achieving target levels of labour share in countries, sectors and industries, both at the national level and at the EU level. The article is structured as follows: the introduction presents a general overview of the problem, identifies gaps in the scientific literature and indicates the main conclusions. The second section presents the theoretical background and empirical evidence. The third section presents the research methodology and data sources. The fourth section examines changes in the labour share of the EU11 and the EU15 from 2009–2018 at the aggregate and sectoral levels, as well as at the service sector level. This section also examines the existence of a relationship between the labour share level and its dynamics and checks the Economies 2022,10, 207 3 of 21 consistency of the general trends in labour share dynamics obtained for the two groups of countries. The fifth section explores the issues of labour share convergence between CEE and WE. At the end of the article, we make conclusions and recommendations for further research. 2. Theoretical Background and Empirical Evidence 2.1. Labour Share Dynamics Since the early 1980s, labour share has declined significantly within the large majority of countries (Lavoie and Stockhammer 2013;Karabarbounis and Neiman 2014;Autor et al. 2017). Between 1995 and 2014, the labour share in OECD countries decreased in 20 countries and increased in 11 countries (Schwellnus et al. 2017). Evolutionary data on labour share in Europe suggest significant heterogeneity between countries (Dao et al. 2017; Berger and Wolf 2017;Archanskaia et al. 2019;Cette et al. 2019). In Europe in transition, the downward trend in labour share is less homogeneous (Stockhammer 2013). CEE countries both on an aggregate and an industry level tend to have a lower labour share than older EU countries (Kónya et al. 2020). In some countries that started with relatively low labour share levels in 2000, most notably Estonia and Latvia, there is an upward trend in labour share (Archanskaia et al. 2019). In Europe, the rate of decline in labour share varies significantly across sectors (Dao et al. 2017;Archanskaia et al. 2019). In most European countries, labour share has increased in the service sector and decreased in other sectors (Díez-Catalán 2018;Dimova 2019). In the service sector, there is an increase in the relative value added, which stimulates the demand for education and skills of workers, supporting the growth of labour share (Dimova 2019). The level and steepness of changes in labour share across sectors are often very different (Archanskaia et al. 2019;Dimova 2019). The opposite directions of changes in labour share in different sectors can be explained by differences in the fungibility of capital by labour (Archanskaia et al. 2019). At the sectoral level, CEE countries tend to have a lower labour share than older EU member states (Kónya et al. 2020). 2.2. Reasons behind the Dynamics of Labour Share The literature identifies two broad groups of explanations for the marked fluctuations in labour share—driving forces associated with manufacturing technologies and drivers that reflect non-technological factors (Dixon and Lim 2020). Technological progress and capital deepening are assumed to be the main determinants of labour share at the sector and industry level (Alvarez-Cuadrado et al. 2017). Technology-driven labour substitution by capita is significantly lower for highly skilled workers (Schwellnus et al. 2018). Falling labour share often reflects faster productivity growth and higher returns on capital than average wages (OECD 2015). Aggregate industrial performance is highly dependent on factors at the company level (Altomonte et al. 2011). There are large (and increasing) differences between firms, which largely stem from uneven productivity (Redding 2006;Altomonte et al. 2011;Perugini et al. 2017;Van Reenen 2018) and capital intensity (Redding 2006). A discrepancy in labour share has been observed between companies with high and low profitability (Furman and Orszag 2018) and between small and large firms (OECD 2017; Haldane 2017;Helpman et al. 2017). Labour share is lower for exporting firms (Perugini et al. 2017;Mertens 2019). Growth in underemployment and temporary contracts are among the main factors contributing to the decline in labour force shares in almost all countries and sectors (Dimova 2019). In the service sector, there is an increase in the relative value added, which stimulates the demand for education and skills of workers, supporting the growth of labour share (Dimova 2019). Previous studies note a number of other reasons for a decrease in labour shares: increased market power (Perugini et al. 2017;Weche and Wambach 2018), decreased competition and increased net profit (Barkai 2020), and increased margins (Bauer and Economies 2022,10, 207 4 of 21 Boussard 2020). Grossman et al. (2017) find that a one-percentage-point slowdown in per capita income growth may explain between half and all the observed decline in labour share in the US. Lavoie and Stockhammer (2013) state that the main reason for a decline in labour share is a change in economic policy as well as the institutional and legal environment. Labour costs, and thus labour share, fluctuate during the business cycle and are highest during a recession (Mohun 2006). The formation of global supply chains as a result of globalization in certain cases, including in the case of foreign direct investment, can also lead to a decrease in labour share (Reshef and Santoni 2022). Given the fairly wide range of possible reasons for a decline in labour share in different countries, Autor et al. (2017) find that the reasons for the decline in labour share in many countries over the past few decades remain unclear. 2.3. Labour Share Convergence in the EU From 1994–2004, there was a sharp convergence of labour share between WE and CEE countries (Czechia, Hungary, Poland, Slovakia) towards the average labour share in the EU12 (Giovannoni 2010). Based on data from twelve eurozone countries from 1976 to 2013, Pino and Soto (2014) find that wage flexibility can stimulate labour share convergence over time. The data indicate weak convergence of labour share across euro-area member states, as found by (Archanskaia et al. 2019). The conclusion on labour convergence is based on the fact that the countries in which labour share was the highest in 2000—for example, Portugal and Spain—experienced a decrease in labour share by 2017. Also, in countries with a relatively low labour share—for example, Slovakia, Latvia, and Estonia—there was an increase in labour share. Giovannoni (2010) claims that labour share convergence has both economic and political reasons. He finds that perhaps it was fiscal policy that played a more important role in the convergence of labour share, with more on the expenditure side than on the tax side. This is explained by the fact that structural funds were created in the EU, and monetary policy was coordinated. While some purely economic phenomena can affect the functional distribution of income, it is largely dependent on changes in institutions and economic policies (Giovannoni 2010). Giovannoni finds that in the EU, labour share convergence is more characteristic of periods of economic growth. Membership of CEE countries in the EU had a positive impact on their economic growth through access to the pan-European market, elimination of barriers to mobility of factors of production, and adoption of EU standards in terms of economic policy, institutions and economic management, which contributes to the convergence of EU countries’ economies in the long term (Crespo-Cuaresma et al. 2008). The market reforms and increased openness that were part of the EU accession process could have contributed to income convergence, especially if they led to increased capital accumulation (Czasonis and Quinn 2012). Sectors in which reforms to improve competitiveness have been the least extensive show a stronger level of labour share divergence between high and low productivity firms (Andrews et al. 2016). Our analysis of the literature allows us to conclude that there are a number of factors that have a positive impact on the convergence of labour share between the EU11 and EU15 countries, which allows us to test the hypothesis that in the period of 2009 to 2018 there was a convergence of labour share between the countries of the EU11 and the countries of the EU15. 3. Methodology and Data 3.1. Methodology The primary data required for the present research included labour cost share (labour share), the calculation of which was done by dividing companies’ personnel costs by value added. This ratio was calculated for each country and industry analyzed. The labour cost arithmetic average was calculated for two sets of countries, which were classified into two groups based on the countries’ period of joining the EU: new members/EU11 (CEE) and old members/EU15 (WE). In the scientific literature, it is often noted that there is a certain heterogeneity of labour share across both countries and sectors. Therefore, we Economies 2022,10, 207 5 of 21 considered labour share not only at the aggregate level, but also at the level of sectors as well as sub-sectors of services. To see if there was a convergence in the labour share observed, we compared the difference in labour share between the two sets of countries in 2009 and 2018. The convergence speed was calculated as the relative change in the labour share differences at the beginning and at the end of the period. We calculated the labour share in relation to value added, since value added is the best proxy for a company’s generated value, which is gross income from operating activities after adjusting for operating subsidies and indirect taxes. The convergence of the economy between the EU11 and the EU15 was calculated on the basis of GDP per capita using the same calculation methodology as for calculating the convergence of labour shares. For all the dataset levels (aggregate data, industry sectors, and service industry groups) we ran a one-factor regression for EU11 and for EU15 countries to detect if there is any relationship between the growth of labour share and labour share level at the beginning of the period analyzed, i.e., in 2009. As the independent variable, we selected the initial level of share of labour cost, its value in 2009, and as the dependent variable, the growth of labour cost was selected. The regression equation we have applied was the following: LSG =α+β×LSL +ε, where LSG—labour share growth during the period of 2009–2018, LSL—labour share level in 2009. The following regression was run to all countries and industries within the framework of the analysis. Correlation between these two variables was additionally considered to understand the sensitivity of the relationship. Additionally, we tested the results of previous studies with regard to the influencing factors on a decline in labour share and, therefore, on the convergence of labour share indicators. The ratios selected as potential descriptors of the relationship are listed in the next section, “Data”. 3.2. Data The data for the research were extracted from the Eurostat database section dedicated to structural business statistics (SBS). The dataset we built as a basis for the research included personnel cost and value added in EUR. Personnel cost is defined as the total remuneration paid by the employer and also includes taxes and social contributions. We did not consider non-wage remuneration within the present research due to data availability limitations. The indicators were extracted on the aggregate level for the total business economy except financial and insurance activities. Total business economy, according to the Eurostat Structural Business Statistics definition, includes all activities of the business economy with the exception of agricultural activities and personal services (Eurostat Structural Business Statistics 2021). Furthermore, to see if the patterns we observed within particular sectors follow the pattern on the aggregate level, we considered the following sectors: construction, trade, industry and services. The selection of sectors was based on Eurostat database Structural Business Statistics, which provides the required data for industry (NACE Rev.2 B-E), construction (NACE Rev.2 F), trade (NACE Rev.2 G), and services (NACE Rev.2 H-N). To identify which industries are responsible for the change in labour share within the service sector, and whether the growth of labour share in these industries matches the growth of the service sector as a whole, we introduced a more detailed breakdown within the service sector: accommodation and food service activities; administrative and support service activities; information and communication; professional, scientific and technical activities; real estate activities; and transportation and storage. Economies 2022,10, 207 6 of 21 We considered the period of 2009 to 2018 to represent an optimal balance of the maximum available time frame and the number of sample countries to have as many consistent observations as possible. At the time of conducting research in 2021, Eurostat provided the required data for all industries and countries included in the analysis for the period from 2009 till 2018. Therefore, this resulted in certain limitations to the present research. The ratios we selected to describe the reasons behind labour share convergence are as follows: labour productivity (provided by Eurostat; Eurostat 2021), the level of innovative development proxied by the Summary Innovation Index (provided by the European Commission), tertiary education (provided by the European Commission as a Summary Innovation Index component, European Commission 2007,2019), the Financial Development Index (provided by the IMF), gross capital formation (World Bank 2021a,2021b) and the volume of exports in relation to GDP (Eurostat); we compared these indicators from 2018, calculated as means, for the EU11 and the EU15. Additionally, we looked at the shadow economy size based on IMF data (IMF 2019a). 4. Research and Discussion 4.1. Labour Share Growth 4.1.1. Labour Share Growth: Aggregate Level In the period of 2009 to 2018, labour share in value added in the EU11 decreased by 2.1 percentage points, while in the EU15 it decreased by 4.3 percentage points (Appendix A Table A1). In order to determine whether a low level of labour share in some countries, as noted by Archanskaia et al. (2019) and Kónya et al. (2020), is a factor influencing the growth of labour share and thus the convergence of labour share between the EU11 and the EU15, we ran a one-factor regression analysis to see if initial labour share influences its growth (Figure 1). Economies 2022, 10, x FOR PEER REVIEW 6 of 22 To identify which industries are responsible for the change in labour share within the service sector, and whether the growth of labour share in these industries matches the growth of the service sector as a whole, we introduced a more detailed breakdown within the service sector: accommodation and food service activities; administrative and support service activities; information and communication; professional, scientific and technical activities; real estate activities; and transportation and storage. We considered the period of 2009 to 2018 to represent an optimal balance of the maximum available time frame and the number of sample countries to have as many consistent observations as possible. At the time of conducting research in 2021, Eurostat provided the required data for all industries and countries included in the analysis for the period from 2009 till 2018. Therefore, this resulted in certain limitations to the present research. The ratios we selected to describe the reasons behind labour share convergence are as follows: labour productivity (provided by Eurostat; Eurostat 2021), the level of innovative development proxied by the Summary Innovation Index (provided by the European Commission), tertiary education (provided by the European Commission as a Summary Innovation Index component, European Commission 2007; European Commission 2019), the Financial Development Index (provided by the IMF), gross capital formation (World Bank, 2021a; World Bank, 2021b) and the volume of exports in relation to GDP (Eurostat); we compared these indicators from 2018, calculated as means, for the EU11 and the EU15. Additionally, we looked at the shadow economy size based on IMF data (IMF 2019a). 4. Research and Discussion 4.1. Labour Share Growth 4.1.1. Labour Share Growth: Aggregate Level In the period of 2009 to 2018, labour share in value added in the EU11 decreased by 2.1 percentage points, while in the EU15 it decreased by 4.3 percentage points (Appendix A Table A1). In order to determine whether a low level of labour share in some countries, as noted by Archanskaia et al. (2019) and Kónya et al. (2020), is a factor influencing the growth of labour share and thus the convergence of labour share between the EU11 and the EU15, we ran a one-factor regression analysis to see if initial labour share influences its growth (Figure 1). Figure 1. Relationship between level of labour share in 2009 and labour share dynamics. While we do not see any significant relationship between the labour share level and its growth for the period of 2009 to 2018 among EU15 countries, there is a strong relationship between the labour share level and its growth among EU11 countries: the higher the initial level of labour share is, the faster it declines, and in the case it is already quite low, it does not tend to decline further. R² = 0.8908 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7 0.75 -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% Labour share in 2009 Labour share dynamics 2009 −2018 EU11 R² = 0.0535 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8 -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% Labour share in 2009 Labour share dynamics 2009−2018 EU15 −−− −− − Figure 1. Relationship between level of labour share in 2009 and labour share dynamics. While we do not see any significant relationship between the labour share level and its growth for the period of 2009 to 2018 among EU15 countries, there is a strong relationship between the labour share level and its growth among EU11 countries: the higher the initial level of labour share is, the faster it declines, and in the case it is already quite low, it does not tend to decline further. 4.1.2. Labour Share Growth: Sectoral Level Let us consider how the labour share of the EU11 and the EU15 changed at the sectoral level in 2009–2018 (Figure 2). Data on the growth of labour share of the EU11 and the EU15 at the sectoral level for 2009–2018 are presented in Appendix ATable A1. Economies 2022,10, 207 7 of 21 Economies 2022, 10, x FOR PEER REVIEW 7 of 22 4.1.2. Labour Share Growth: Sectoral Level Let us consider how the labour share of the EU11 and the EU15 changed at the sectoral level in 2009–2018 (Figure 2). Data on the growth of labour share of the EU11 and the EU15 at the sectoral level for 2009–2018 are presented in Appendix A Table A1. Figure 2. Changes in labour share in the EU11 and the EU15 for 2009–2018. In all four sectors surveyed in 2009, the labour share in the EU11 was lower than in the EU15. These results correlate with data from Kónya et al. (2020) indicating that at the sectoral level, CEE countries tend to have a lower labour share than older EU member states. Although the same situation continued in 2018, in the manufacturing sector, the EU11 almost reached the EU15 level, and in the service sector, it came much closer to the EU15 indicator. We also calculated that the average decline in labour share over the period of 2009–2018 at the sectoral level in the EU15 was 17% more pronounced than in the EU11. The change in labour share in the EU11 sectors varied from minus 9.6 percentage points in the trade sector to plus 0.2 percentage points in the service sector. The decline in labour share in the EU15 ranged from 2.1 percentage points in the service sector to 10.0 percentage points in manufacturing. The largest decrease in labour share in the EU, and primarily in the EU15 in the manufacturing sector, can be explained by the most intensive use of capital in this sector (OECD 2019). In the construction and trade sectors, the difference in labour share between the EU11 and the EU15 in 2018 was much larger (11.0 and 8.5 percentage points) than in the manufacturing and service sectors (0.6 and 2.8 percentage points). One of the possible reasons for the largest labour share gap between the EU11 and the EU15 occurring in the construction and trade sectors is possibly the higher level of the shadow economy in the EU11 countries in these sectors. For example, in Latvia the level of the shadow economy Figure 2. Changes in labour share in the EU11 and the EU15 for 2009–2018. In all four sectors surveyed in 2009, the labour share in the EU11 was lower than in the EU15. These results correlate with data from Kónya et al. (2020) indicating that at the sectoral level, CEE countries tend to have a lower labour share than older EU member states. Although the same situation continued in 2018, in the manufacturing sector, the EU11 almost reached the EU15 level, and in the service sector, it came much closer to the EU15 indicator. We also calculated that the average decline in labour share over the period of 2009–2018 at the sectoral level in the EU15 was 17% more pronounced than in the EU11. The change in labour share in the EU11 sectors varied from minus 9.6 percentage points in the trade sector to plus 0.2 percentage points in the service sector. The decline in labour share in the EU15 ranged from 2.1 percentage points in the service sector to 10.0 percentage points in manufacturing. The largest decrease in labour share in the EU, and primarily in the EU15 in the manufacturing sector, can be explained by the most intensive use of capital in this sector (OECD 2019). In the construction and trade sectors, the difference in labour share between the EU11 and the EU15 in 2018 was much larger (11.0 and 8.5 percentage points) than in the manufacturing and service sectors (0.6 and 2.8 percentage points). One of the possible reasons for the largest labour share gap between the EU11 and the EU15 occurring in the construction and trade sectors is possibly the higher level of the shadow economy in the EU11 countries in these sectors. For example, in Latvia the level of the shadow economy in the construction sector (28.7%), wholesale trade (25.3%) and retail trade (23.9%) exceeded the level of the shadow economy in manufacturing (23%) by 5.7, 2.3 and 0.9 percentage points, respectively (Sauka and Putnin ,š 2021). Our findings correlate with data from Dao et al. (2017) and Archanskaia et al. (2019) indicating that in Europe, the level of labour share decline in different sectors varied significantly. However, our analysis of the growth of labour share in the service sector in Economies 2022,10, 207 8 of 21 the EU as a whole and in the EU15 in particular runs counter to the data of Díez-Catalán (2018) and Dimova (2019), which find that labour share in the service sector has increased in most European countries. Our calculations of labour share in value added in the service sector in the EU15, as well as in the EU as a whole, show a negative trend in the period of 2009–2018. In the EU15, the labour share in the service sector fell by 2.1 percentage points, while in the 26 EU countries it fell by 1.1 percentage points. Only in the EU11 in the service sector was there a small 0.2 percentage point increase in labour share. The difference in the trends of labour share dynamics in the service sector that we found as contrasted to the findings of Díez-Catalán(2018) could be explained by the difference in time period and in regional coverage. The observation period in the Dimova study (Dimova 2019) also starts much earlier (2002) and ends in 2016. It is possible that the shorter period of our study, which begins after the 2008 Global Financial Crisis, reflects more recent trends that are not visible 15–20 years earlier. Since we found a strong relationship between the labour share level and its growth among EU11 countries at the aggregate level and significant differences in the growth of labour share of the EU11 and the EU15 at the sectoral level, we will further consider whether there is a relationship between the labour share level and its growth which could have influenced the convergence of labour share of the EU11 and the EU15 at the sectoral level too (Figure 3). The results of the regression analysis are presented in Appendix A Table A2. Economies 2022, 10, x FOR PEER REVIEW 8 of 22 R² = 0.8371 R² = 0.4624 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% -30.00% -20.00% -10.00% 0.00% 10.00% Labour share in 2009 Labour share dynamics 2009−2018 Manufacturing EU 11 EU 15 Linear (EU 11) Linear (EU 15) R² = 0.5055 R² = 0.0421 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% Labour share in 2009 Labour share dynamics 2009−2018 Construction EU 11 EU 15 Linear (EU 11) Linear (EU 15) R² = 0.9261 R² = 0.0962 0.3 0.4 0.5 0.6 0.7 0.8 0.9 -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% Labour share in 2009 Labour share dynamics 2009−2018 Trade EU 11 EU 15 Linear (EU 11) Linear (EU 15) R² = 0.7177 R² = 0.5926 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 -30.00% -20.00% -10.00% 0.00% 10.00% Labour share in 2009 Labour share dynamics 2009−2018 Services EU 11 EU 15 Linear (EU 11) Linear (EU 15) in the construction sector (28.7%), wholesale trade (25.3%) and retail trade (23.9%) exceeded the level of the shadow economy in manufacturing (23%) by 5.7, 2.3 and 0.9 percentage points, respectively (Sauka and Putniņš 2021). Our findings correlate with data from Dao et al. (2017) and Archanskaia et al. (2019) indicating that in Europe, the level of labour share decline in different sectors varied significantly. However, our analysis of the growth of labour share in the service sector in the EU as a whole and in the EU15 in particular runs counter to the data of Díez-Catalán (2018) and Dimova (2019), which find that labour share in the service sector has increased in most European countries. Our calculations of labour share in value added in the service sector in the EU15, as well as in the EU as a whole, show a negative trend in the period of 2009–2018. In the EU15, the labour share in the service sector fell by 2.1 percentage points, while in the 26 EU countries it fell by 1.1 percentage points. Only in the EU11 in the service sector was there a small 0.2 percentage point increase in labour share. The difference in the trends of labour share dynamics in the service sector that we found as contrasted to the findings of Díez-Catalán (2018) could be explained by the difference in time period and in regional coverage. The observation period in the Dimova study (Dimova 2019) also starts much earlier (2002) and ends in 2016. It is possible that the shorter period of our study, which begins after the 2008 Global Financial Crisis, reflects more recent trends that are not visible 15–20 years earlier. Since we found a strong relationship between the labour share level and its growth among EU11 countries at the aggregate level and significant differences in the growth of labour share of the EU11 and the EU15 at the sectoral level, we will further consider whether there is a relationship between the labour share level and its growth which could have influenced the convergence of labour share of the EU11 and the EU15 at the sectoral level too (Figure 3). The results of the regression analysis are presented in Appendix A Table A2. − Figure 3. Relationship between level of labour share in 2009 and labour share growth: sectoral level. Considering the sample of EU11 countries, the strongest inverse relationship between the level of labour share and its further growth is observed within the trade and manufacturing industries, followed by services and construction, as verified by the determination coefficient exceeding 0.5. With regard to the sample of EU15 countries, no relationship is seen between these two variables if the construction and trade industries are considered, i.e., the level of Economies 2022,10, 207 15 of 21 the convergence of labour share in EU11 and EU15 countries, given that the latter have a higher labour share. In our study, using the service sector as an example, we showed that the direction and rate of changes in labour share for different industries of the same sector, both for groups of countries and for specific countries, can vary greatly. This allowed us to make recommendations on the labour share research methodology of the labour share survey. Namely, that it is necessary to take into account the dynamics of the share of labour not only at the sectoral level, but also at the industry level. Several factors could have influenced the accuracy of the results of our study. First, the study did not consider changes in the proportion of self-employed persons, while Elsby et al. (2013) find that a third of declining labour share is an artifact of statistical procedures, to impute self-employed labour income. Second, there are various forms of indirect reward. Thus, Smith et al. (2019) find that owner-managers of S corporations have a tax incentive to misrepresent their income as business income rather than wages, which may be more common in WE. Third, our calculations based on data on the level of the shadow economy in the EU11 and the EU15 in 2009 and 2018 (IMF 2019b) and data on the share of unofficial wages in the shadow economy (Putni n , š and Sauka 2015) indicate that the level of employment in the shadow economy in CEE countries in 2009 was on average about 2.8 percentage points higher than in WE, and in 2018 it was on average about 1.8 percentage points higher than in WE. 7. Recommendations for Future Research Since the observation period in our study corresponded to the period of economic growth, and according to the point of view of Giovannoni (2010), labour share convergence is more typical for periods of economic growth. In future studies it would also be advisable to test the level of labour share convergence between CEE and WE for a longer period of time. This would allow our conclusions to be verified not only in the positive phase of the business cycle. In addition, the duration of the period of change in the labour share trend can be much longer than the business cycle (Mu´ck et al. 2015;Acemoglu and Restrepo 2018; Charpe et al. 2019), which also requires a longer observation period. Additionally, we recommend conducting further analysis of the implications of the convergence of EU11 and EU15 labour shares in terms of policy implications, taking into account the direct and indirect impacts on aggregate demand. Author Contributions: Both authors contributed significantly to the completion of this manuscript. A.P. designed the concept of the paper, wrote the literature review, analyzed the data and developed conclusions. J.B. contributed to the methodology of the research, data gathering, analyzing and interpretation. All authors have read and agreed to the published version of the manuscript. Funding: The APC was funded by Krišj ¯ a n , a Valdem ¯ ara Foundation (NOD), 40008227683, R ¯ ıga, Krišj¯ an ,a Valdem¯ ara str. 35-1, LV-1010. Data Availability Statement: Publicly available datasets were analyzed in this study. The authors used the following data providers: Eurostat, IMF, World Bank, European Commission. The references to the datasets are explicitly provided in the end of the manuscript. Acknowledgments: We express our deep gratitude to the reviewers for their valuable advice and comments. We are also grateful to Levs Fainglozs for the technical support being important to us when preparing the manuscript. We are thankful to Krišj ¯ anis Valdem ¯ ars Foundation for financially supporting publication of this research. Conflicts of Interest: The authors declare no conflict of interest. Economies 2022,10, 207 16 of 21 Appendix A Table A1. Labour share dynamics and convergence in the EU11 and the EU15 (in %), aggregate data and sectors, 2009–2018. Years/Sectors EU11 EU15 Difference Convergence 2009 2018 Delta 2009 2018 Delta EU11/EU15 2009 EU11/EU15 2018 Aggregate data 55.88 53.80 −2.08 61.41 57.12 −4.29 5.53 3.32 39.96% (convergence) Manufacturing 61.29 56.6 −4.69 67.2 57.21 −9.99 5.91 0.61 89.68% (convergence) Services 54.27 54.5 0.23 59.43 57.34 −2.09 5.16 2.84 44.96% (convergence) Construction 60.79 55.93 −4.86 74.49 66.95 −7.54 13.7 11.02 19.56% (convergence) Trade 62.25 52.62 −9.63 63.67 61.12 −2.56 1.42 8.5 6×(divergence) Table A2. Labour share level in 2009 (independent variable, x) and its dynamics in 2009–2018 (dependent variable, y) regression results, aggregate data and sectors, 2009–2018. Sectors EU11 EU15 Coefficient p-Value R R-Square Coefficient p-Value R R-Square Aggregate data −0.66 0.00 0.94 0.89 −0.18 0.55 0.23 0.05 Manufacturing −0.55 0.00 0.91 0.84 −0.43 0.01 0.68 0.46 Services −0.78 0.00 0.85 0.72 −0.84 0.00 0.77 0.59 Construction −0.56 0.01 0.71 0.51 −0.14 0.48 0.21 0.04 Trade −0.76 0.00 0.96 0.93 −0.29 0.26 0.31 0.10 Table A3. Labour share convergence in the EU11 and the EU15, service sector industries, 2009–2018. Service Industries EU11 EU15 Difference Convergence/Trend Changes 2009 2018 Delta 2009 2018 Delta EU11/EU15 2009 EU11/EU15 2018 Accommodation and food service activities 74.68 66.1 −8.58 70.53 69.56 −0.97 4.15 3.46 16.63% (convergence + trend changes) Administrative and support service activities 65.27 65.06 −0.21 64.92 65.33 0.41 0.35 0.27 22.86% (convergence + trend changes) Information and communication 44.55 56.31 11.76 53.23 55.25 2.02 8.68 1.06 87.79% (convergence + trend changes) Professional, scientific and technical activities 58.07 57.28 −0.79 64.94 61.26 −3.68 6.87 3.98 42.07% (convergence) Real estate activities 26.56 21.85 −4.71 38.84 23.91 −14.93 12.28 2.06 83.22% (convergence) Transportation and storage 63.28 56.76 −6.52 71.06 63.32 −7.74 7.78 6.56 15.68% (convergence) Table A4. Labour share level in 2009 (independent variable, x) and its dynamics in 2009–2018 (dependent variable, y) regression results, service industry sub-groups, 2009–2018. Service Sub-Group EU11 EU15 Coefficient p-Value R R-Square Coefficient p-Value R R-Square Transportation and storage −0.78 0.00 0.85 0.72 −0.84 0.00 0.77 0.59 Accommodation and food services −0.63 0.01 0.77 0.59 −0.00 0.99 0.00 0.00 Information and communication * −0.78 0.03 0.65 0.42 −0.32 0.07 0.51 0.26 Real estate * −0.35 0.08 0.55 0.30 −0.16 0.24 0.34 0.12 Professional * services −1.25 0.00 0.95 0.91 −0.12 0.32 0.29 0.08 Administrative and support services −0.00 0.99 0.01 0.00 0.06 0.79 0.07 0.01 * Ireland was excluded from calculations as it appeared to be an outlier in these data sets. Economies 2022,10, 207 17 of 21 Table A5. Labour share dynamics in the EU countries 2009–2018, aggregate and sectoral level (percentage points). Country Groups Country Aggregate Level Sectors Construction Manufacturing Services Trade EU11 Bulgaria 3.35 9.70 −2.08 7.40 1.04 Croatia −1.32 12.22 −3.73 −2.51 −4.20 Czechia 1.29 −4.64 −1.03 3.62 −9.04 Estonia −5.01 −11.31 −6.38 0.43 −19.49 Hungary −4.35 −20.75 0.38 −4.62 −17.21 Latvia 0.47 −4.50 −8.18 6.75 −10.50 Lithuania −11.24 −18.53 −8.45 −6.66 −28.64 Poland 4.17 4.45 3.91 6.15 4.38 Romania 4.25 6.59 0.58 8.06 −0.31 Slovakia −4.23 −23.31 −15.15 −5.10 −8.82 Slovenia −10.22 −3.43 −11.53 −11.03 −13.18 EU11 Total 0.83 −4.86 −4.70 0.23 −9.64 EU15 Austria −0.48 3.40 −2.10 0.82 −6.40 Belgium −3.66 −2.63 −10.58 −4.51 1.65 Denmark −12.46 −3.59 −15.71 −12.00 −8.83 Finland −5.54 2.74 −15.16 −2.15 −3.28 France −0.63 −0.52 −6.53 2.26 0.67 Germany 0.77 −14.28 −9.40 6.19 5.63 Greece 6.78 −2.77 0.94 8.58 13.64 Ireland −25.27 −73.54 −17.15 −24.24 −13.71 Italy −5.80 −6.54 −11.42 −0.93 −5.64 Luxembourg −4.85 −9.32 −21.09 2.11 −10.86 Netherlands −3.88 −7.71 −7.16 −3.54 −7.91 Portugal −0.19 4.96 −6.77 3.50 −1.39 Spain −1.37 6.92 −8.56 1.35 −2.10 Sweden −3.13 −2.27 −13.07 −1.34 2.64 United Kingdom −4.56 −7.88 −6.11 −7.45 −2.49 EU15 Total −3.34 −7.54 −9.99 −2.09 −2.56 Table A6. Labour share dynamics in the EU countries 2009–2018, service sector industries (percentage points). Country Groups Country Service Sector Service Sector Industries Accommodation and Food Service Activities Administrative and Support Service Activities Information and Communication Professional, Scientific and Technical Activities Real Estate Activities Transportation and Storage EU11 Bulgaria 7.40 −0.85 5.76 23.24 9.11 −3.69 −6.41 Croatia −2.51 −12.89 −3.92 3.25 6.08 −5.49 −5.54 Czechia 3.62 −0.97 4.95 9.41 5.33 −2.20 −1.86 Estonia 0.43 −16.18 −13.28 14.48 −5.87 −2.21 4.75 Hungary −4.62 −29.87 −1.86 5.29 −16.64 −4.69 −6.81 Latvia 6.75 −4.38 2.08 13.43 15.02 −4.08 5.13 Lithuania −6.66 −20.13 −8.25 14.58 −13.88 −11.02 −9.80 Poland 6.15 −3.27 7.17 14.55 17.57 −9.81 −3.08 Romania 8.06 1.47 9.52 20.03 4.84 2.16 −1.50 Slovakia −5.10 2.66 3.79 15.80 −17.74 −5.52 −26.00 Slovenia −11.03 −9.93 −8.20 −4.63 −12.44 −5.20 −20.66 EU15 Austria 0.82 1.64 9.54 1.87 −5.69 2.56 −2.54 Belgium −4.51 −2.63 5.79 −4.55 −9.63 0.23 −7.01 Denmark −12.00 2.56 −1.20 −1.26 −1.59 −7.43 −27.29 Finland −2.15 −2.74 1.62 −5.46 −1.34 2.53 −5.79 France 2.26 0.98 6.19 5.89 −2.51 4.52 −0.90 Germany 6.19 −0.39 1.28 10.62 3.01 6.04 7.26 Greece 8.58 16.26 5.52 7.32 5.32 1.45 3.41 Ireland −24.24 −14.73 −16.32 −9.84 −26.94 −229.58 −24.82 Italy −0.93 −3.47 −2.59 3.52 −1.65 1.52 −10.00 Luxembourg 2.11 11.66 13.40 5.41 −1.86 2.53 −23.90 Netherlands −3.54 −4.74 −4.64 0.87 −5.23 −5.49 −3.79 Portugal 3.50 −5.46 2.90 11.35 4.32 −1.63 3.13 Spain 1.35 −1.72 −2.06 9.03 5.77 2.35 −8.09 Sweden −1.34 −4.23 −1.23 0.37 −10.34 3.06 −7.47 United Kingdom −7.45 −7.61 −12.12 −4.79 −6.79 −6.70 −8.44 Economies 2022,10, 207 18 of 21 References Acemoglu, Daron, and Pascual Restrepo. 2018. 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