Drivers of inequality: wages vs. profits in European industries

Amongst the drivers of inequality, income distribution between wages and profits at the level of individual industries plays a key role. The factors shaping the parallel evolution of wages and profits are investigated in this article building on Post-Keynesian and evolutionary perspectives. We develop a simultaneous model on wage and profit dynamics identifying as key determinants the capital-labour conflict, the expansion of value added per hour worked, different strategies of technological change and offshoring, and the relevance of trade unions. The empirical investigation includes an industry-level analysis on 38 manufacturing and service sectors for six major European countries from 1994 to 2014. Wage and profit dynamics are shown to be rooted in structural change and capital-labour conflict, with profits driven by product innovation and offshoring, and wages rising faster where new products are relevant and trade unions have a greater role.