Dynamics of labour income share in Latvia and the EU

Abstract

This paper provides quantitative evidence that during the recent economic expansion the wage growth in Latvia as well as in other Baltic States, by far exceeded the productivity increase. First, we construct a real wage–labour productivity relation and demonstrate that a positive gap is still evident by the end of 2009, although decreased markedly during the recent year. Second, we calculate employee compensation to gross value added (GVA) ratio and labour income share composites for each EU country and show how their dynamics is related to time and economic cycle. It was found that the labour income share is a cyclical in the old EU countries on average but procyclical in Latvia and Estonia. Third, we decompose employee compensation to GVA ratio into changes of economic structure, composition of employment and true wage–productivity effect and show that only the latter two effects were significant in Latvia.