The Impact of Wage Share on Exports of the European Union Countries

Abstract

Many studies have found that shrinking wage share can affect aggregate demand both positively and negatively. There is more evidence in the literature that the impact on domestic demand (consumption expenditures) is negative whereas the influence on foreign demand (exports) is positive. In the case of overall positive impact, the aggregate demand regime is profit-led; otherwise, it is wage-led. The nature of demand regime depends on the relative shares of the domestic and foreign demand in total demand. The consumption, investment, and exports sensitivity to the wage share changes is another crucial factor shaping demand regime. We can assume that changes in wage share make a more significant impact on the exports of those countries where foreign demand’s share in GDP is relatively large. Decreasing wage share is related to the lower labor costs which in turn stimulates export competitiveness. If foreign markets are less important for countries’ economy and exports’ share in GDP is relatively small, this might weaken the relationship between wage share changes and export competitiveness. This study aims to assess whether the effect of a decrease in wage share on exports (foreign demand) depends on countries’ share of exports in GDP. Using a panel of 28 EU countries over a 20-year period (1995–2015), I found that in countries where exports’ share in GDP is relatively large, exports’ sensitivity to the wage share changes is higher.