The development of the wage share in the euro area since the start of the pandemic, Prepared by Katalin Bodnár and Matthias Mohr, Published as part of the ECB Economic Bulletin, Issue 4/2023

Recent developments in economic activity and the surge in inflation have raised questions about income distribution between the factors of production, namely labour and capital. The wage share (or labour share) is a measure that can capture some of these distributional aspects. It indicates the share of nominal domestic income allocated to labour. In this box it is calculated as total compensation of employees, corrected for the share of self-employed, divided by gross nominal value added. The wage share is intimately interlinked with profit margins. Its development reflects both long-term structural drivers, such as technological changes, globalisation, sectoral reallocation and institutional characteristics (including changes in labour and product market regulation and (minimum) wage-setting frameworks), and more medium-term business cycle drivers, such as labour market tightness and workers’ bargaining power. The wage share can be an important indicator of inflationary pressures through second-round effects on prices.