| Abstract [eng] |
Functional income distribution and the stability of factor shares – labor and capital reveal the relationship between employers and employees, and show how they split the national income, thus the long-term decline in labor share can have a negative effect on the income inequality between individuals. Surprisingly, changes in labor share and factors affecting it are comparatively under-researched in the scientific literature, especially when considering small economies. Thus, the aim of this research is to analyze changes in labor share in national income of the three Baltic countries, to determine the causes for these changes and disclose their macroeconomic implications. In order to achieve this aim, three main and two shadow economy vector error correction models were constructed using time series data of the three Baltic countries. Econometric analysis was complimented with labor share trend exploration, confirming decreasing labor share trend in all three Baltic countries for the period of past 20 years. Research results point to government spending factor in Lithuania and Latvia as the main contributor to changes in labor share. This confirms the government’s ability to address the issue of declining labor share and growing income inequality through proper policy measures to distribute taxation burden between capital and labor owners more equally. Another significant contributor to declining share of income attributed to employees is shadow economy. This indicator showed large long-term effect in Lithuania and could be diminishing government’s ability to address this issue. |
