Level and development of the wage share in Belgium
Belgium is known for its relatively high cost of labour and system of automatic wage indexation designed to shield household income from the impact of inflation. Nevertheless, the wage share – the proportion of value added in the economy attributed to the compensation of employees – has fallen in Belgium since 2013, while remaining stable in the euro area over the same period. A decline can be seen across most sectors of activity.
Value added is often compared to an economic pie which is divided between labour and capital. The wage share represents the part that goes to labour. It is important to note that this concept more closely reflects the employer’s cost of labour than the net wage ultimately received by employees.
Impact of wage moderation policies and the lowering of employer social security contributions
It appears that the decline in the wage share observed since 2013 is primarily attributable to an increase in labour productivity without an accompanying increase in real hourly wages. This is due, among other factors, to wage moderation policies (e.g. the temporary suspension of wage indexation in 2015) and reductions in employer social security contributions. In addition, the government introduced various other measures to curb labour cost growth for companies. Lastly, the wage norm system in Belgium limits the margin for real wage increases on top of inflation-related adjustments.
Impact of composition effects and intra-sector dynamics
The analysis of the aggregate wage share can be extended to sector level and shows, for example, that around one-third of the decline in the wage share in Belgium between 2013 and 2023 was due to changes in the weights of various sectors in the economy. These are called “composition effects”. The weight of the pharmaceutical industry, for example, has increased in recent years. In general, this sector is more capital intensive and has a lower wage share, which fell over the period considered. Due to the sector’s higher value added, its lower wage share has a relatively greater impact on the aggregate wage share.
However, the largest portion (two-thirds) of the decline in the wage share is attributable to a fall in the wage share in the individual sectors (regardless of composition effects), particularly market services.
Impact of firms with a low wage share
At firm level, we see that production has shifted in part to companies with a lower wage share: firms in the lowest wage-share percentiles accounted for a larger share of value added in 2022 than in 2013.
Firm-level analysis reveals heterogeneity, however. Although the wage share is now lower than in 2013, slightly less than half of firms actually saw a decline in their wage share. The trend in the wage share is in fact determined mainly by the largest firms. These have seen a relatively large decline in their wage share since 2013 and account for a greater share of total value added.
Possible consequences for GDP and public finances
Labour income is typically an important determinant of household consumption. Hence, a declining wage share may have consequences for the composition of GDP, to the detriment of household consumption. Business investment, on the other hand, may benefit.
A declining wage share is also associated with higher inequality according to the literature, but we find no evidence for this in the case of Belgium. On the contrary, indicators of income inequality in Belgium suggest that inequality has declined over the past decade, despite the fall in the wage share. A decline in the unemployment rate most likely contributed to this.
Finally, a declining wage share also has implications for public finances. When a smaller share of the economic pie goes to labour, this can strain public coffers as labour income is taxed most heavily.