Functional income distribution in European transition countries

This paper studies the drivers of labour share dynamics in transition economies in Europe. We perform a long-run country-level regression analysis for the period 1990-2010, finding that capital-labour substitution and technological change were the main drivers of the decline in the labour share but no role can be ascribed to changes in the regulatory setting of the product and factor markets. However, by focusing on a relatively more recent period of time and by exploiting cross-sectoral data variation, we find that the decline in the labour share was mainly due to the deregulation of the labour market, whereas an easier firm’s access to the market and, more generally, larger business freedom had an opposite effect, i.e. they increased the value added share accruing to workers