Demographic Change and the Labour Share of Income

Despite similar levels of per capita income, education, and technology the development of labour shares in OECD countries has displayed differing patterns since 1960. This paper examines the role of demography in this regard. Employing an overlapping generations model we simulate how labour shares are affected by increasing expected retirement durations and decreasing labour force growth rates. We simulate these effects in closed economy and small open economy frameworks for countries with fully funded or pay-as-you-go pension systems. Our simulations suggest negative labour share effects of both demographic shocks which are particularly large in open economies. We test the simulation results empirically using panel cointegration methods for a panel of 23 OECD countries and find significant long-run effects of all demographic variables on labour shares supporting the results of our simulations