Wage shares in Swedish industries.
A deeper dive than in a previous post.
Spoiler: Subscribers who are fed up with the above mentioned subject can delete this email now. It might look like a repetition of previous posts but in this post I look into individual industries. I have constructed a small database for Swedish industries between 1993 and 2022. Statistics Sweden who works in mysterious ways have for reason I do not know, decided to remove data showing developments for industries before 1993.
This post will be followed-up by at least one post about hourly real wages and labour productivity. There is a debate going on whether these variables move together or have been “decoupled”. Some studies imply that growth of real hourly wages is lagging labour productivity growth. The relationship between shares in GDP and real hourly wages vs labour productivity developments is briefly mentioned below already in this post due to its relationship to wage shares in value added.
Anyway, all graphs below cover 30 years. Wage shares have increased slightly in Services industries and decreased slightly in Manufacturing and Construction industries. Thirty years is a relatively short time. These variations may be due to business cycle fluctuations. For longer periods of time, wages shares are relative stable borderline constant.
In the previous post, I looked at depreciation, wage, and profit shares for the whole economy and showed that a stable wage share implies that real wages and labour productivity moves together. The results were derived from the neoclassical model assuming perfect competion and using a Cobb-Douglas production function.
One can argue that perfect competition is a strong assumption. Nevertheless, it worked quite well to represent the above mentioned developments with it. One could also question whether it is appropriate to show wage and profit shares for the whole economy since it included the public sector. The first graph of this post shows two series for wage shares including and excluding the public sector respectively.
Wage shares in private and public sectors
The graph shows two things. The wage share in the public sector is larger. That was to be expected. The wage shares, although stable, increase slightly over the years.
Source: Statistics Sweden. Note: “Industry” L68A is included in the National Accounts even though it consists of single homes. Employment, hours worked or wages are not recorded for us owning a single home. Therefore it is excluded in my calculations. The industries are denoted according to NACE Rev 2 which you can find here.
Below, I will focus on the private sector. At least mostly private. In some industries many firms are owned by muncipalities and other public sector entities. That concerns especially utility industries producing energy, water supply, waste management and recycling.
Income shares in private sectors
Anyway. The wage share below is the same as above. The interesting variables in the graph are the ones showing developments of shares of depreciation (depshare) and profits (gosshare, nosshare) in value added. The share of gross profit (gosshare) declines slightly over the years. The share of profits that remain after depreciation (nosshare), on the other hand, declines significantly. The decline is due to the increasning share of depreciation over the years. It implies a faster rate of investment in the private sector or parts of it.
Source: Statistics Sweden. Note: w, gos, nos, and dep denote wage, gross operating surplus (gross profits), net operating surplus (net profits), and depreciation respectively.
Splitting the private sector into goods (A01_F43) producing and services (G45_N82exL68A) producing industries reveals that the small increase of the wage share over time is due to developments in the services industries. The wage share in the goods producing industries is more stable over time.
Source: Statistics Sweden.
The increasing wage share in services industries implies that real wages have grown faster than labour productivity since the neclassical model with a Cobb-Douglas function expresses real wages as.
With a constant wage share, (1-a), hourly real wages (w/P) changes labour productivity growth (Y/L). But if the wage share is not constant, real wages increases with the sum of the wage share and labour productivity.
The distribution of income is stable 1993-2022 in the goods producing industries.
Source: Statistics Sweden. Note: w, gos, nos, and dep denote wage, gross operating surplus (gross profits), net operating surplus (net profits), and depreciation respectively.
As noted above, the wage share has increased in services producing industries. The net profit share has declined more than the wage share has increased since the share of deprecation in value added has increased. The net profit share has declined significantly, by more than 12 percentage points.
Source: Statistics Sweden. Note: w, gos, nos, and dep denote wage, gross operating surplus (gross profits), net operating surplus (net profits), and depreciation respectively.
One has to go deeper into goods producing industries to try to understand what is going on. One point of departure is to relax the assumption of perfect competition and instead derive an expression for the real wage under imperfect competition. That looks something like this.
which shows that the labour share is potentially smaller now since it is deflated by a term indicating firms’ markups. A higher markup, indicating weaker competition on the markets, tends to lower the real wage. But, that is for the next post. Below, I will have a look at individual goods and services producing industries respectively. Some industries will be left out.
Income shares in Manufacturing and Construction industries
The wage share in Construction indusries have shifted downwards from a very high level of more than 80 percent to around 75 percent which is still very high. The manufacturing wage share is stable over the whole period.
Source: Statistics Sweden.
For manufacturing industries, the shares of depreciation and net profits confirm the relatively constancy of the wage share over the whole period.
Source: Statistics Sweden.
The labour share in Construction industries is very high even though it has declined since 1993.
Source: Statistics Sweden.
Income shares in Services industries
L68B is property management where the labour input is relatively small most of the time of the year. Another striking development below occurs in the industries denoted I55_I56. These are hotels and restaurants. During the Covid crisis 2020 and 2021, the drastic fall of demand caused many firms to go bankrupt unless they were saved by the government handing out massive subsidies. This led to negative profit shares and a wage share exceeding 1.0 in 2020. Wage shares in the Business Support Services (N77_N82) industries have increased since 1993. Around 2006 the wage share increased from an average of below 0.75 until it reached a new average around 0.85 after 2012.
Source: Statistics Sweden.
Wage shares in the remaining industries are stable over time with the exception of Financial Services industries where the wage share has increased. This implies that hourly real wages have grown faster than labour productivity.
Source: Statistics Sweden.
That is also the case. There has been a positive “decoupling” in these industries. But more about that in a later post. And again, for longer periods of time, the wage share is almost constant as I showed in this post.
And that is of course valid also for other countries. Here the adjusted wage share for UK 1960-2023.
Adjusted wage share for UK 1960-2023.
Source: Ameco Database, European Commission. The wage share is adjusted by the ratio of employed to employee (employed/employees) where the number of employed also include business owners.