Abstract
Long-term stability of relative shares of production factors – labor and capital – was an implied fact for a long time. However, recently empirical data have become available, and several authors have presented a conclusive evidence showing a worldwide decline in labor share, which is especially manifested in Continental Europe.Despite the recent scientific interest in the stability of labor share, the trend analysis for small open economies such as the Baltic countries is very limited in the scientific literature. Therefore, this article aims at analyzing theoretical literature and empirical evidences on the changes in functional income distribution with the focus on the Baltic countries while also providing interpretations of the possible causes for this shift. Authors primarily focus on labor share trends in Lithuania, Latvia, and Estonia, while stressing the importance of the correct measurement of this indicator.
Highlights
Income distribution is a widely discussed topic among politicians, scientists and in society
This fact is rather surprising, since the functional income distribution reveals the relationship between employers and employees, which has a great effect on many aspects of economic and social life
Changes in the functional income distribution in small open economies such as the Baltic countries should be further investigated starting with the correct measurement of the labor share
Summary
Income distribution is a widely discussed topic among politicians, scientists and in society. Keynes provided valuable suggestions in respect of the effects of income distribution on employment, the level and composition of aggregate demand He assumed diminishing marginal returns, with a fixed amount of capital prices would be higher when the output increased, leading to an inverse relation between employment and the purchasing power of money wages. Post-Keynesians did not recognize the role of technology or bargaining power in their models (Stockhammer, 2009) and assumed that since the propensity to save from profits is higher, the level of investment divided by national output should determine the share of profits in the national income (Kaldor, 1957), i.e. post-Keynesian theories see factor shares as endogenously provided by the investment behavior of firms Such view has received its fair share of criticism. This is especially relevant to the Baltic countries which have experienced a rapid liberalization process, structural unemployment, declining labor unions, structural changes, etc
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