Inequality and Employment Sensitivities to theFalling Labour Share

This paper aims at identifying the labour share (wage-productivity gap) as a major factor inthe evolution of inequality and employment. To this end, we use annual data for the US, UKand Sweden over the past forty years and estimate country-specific systems of labourdemand and Gini coefficient equations. Further to the statistical significance of our models,we validate their economic significance through counterfactual simulations. In particular, weevaluate the contributions of the labour share to the trajectories of inequality and employmentduring specific time intervals in the post-1990 years. We find that during the nineties the costof a one percent increase in employment was in the range of 0.7%-0.9% higher inequality inall three countries. However, in the 2000s, whereas the inequality-employment sensitivityratio 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% growth in employment was achieved atthe expense of 1.3% worsening in income inequality. In the light of the significant influence ofthe time-varying labour share on the inequality and employment time paths documented inour sample, the evolution of the wage-productivity gap deserves the attention of policymakers....