Technological advance, the labour share of national income and income inequality in the EU

Abstract

The paper tests the hypothesis that member states of the European Union have been experiencing declining share of labour income due to technological advance. In the literature, this decline is associated with inequality in the distribution of income, reduction in aggregate demand, and threats to social cohesion. In this paper, the results of an econometric test based on a labour demand equation derived from the CES production function, confirms the hypothesis that technological progress negatively affected the labour share of income in the EU, everything else remaining constant. This finding has important implications for EU Member States, including that some form of policy intervention would seem to be necessary, as left to its own devices, the capitalist system, which has brought about technological progress, could lead to a continuing fall in the share of labour income.