Closing the productivity–wage gap in the European Union: The role of the labor share

This paper examines the determinants of the productivity–wage gap in the European Union between 2002 and 2018, with a focus on the role of the labor share. Drawing on a nested CES production framework and industry-level data for 17 EU countries, we find that higher tangible capital intensity, particularly in non-ICT assets, together with capital-biased technological progress, have reduced the labor share of low- and medium-skilled workers. Institutional changes, including weaker collective bargaining coverage, the erosion of employment protection and the rising use of temporary contracts, have further accelerated this decline. Our results reveal marked heterogeneity across asset types, industries and skill groups, highlighting the need for targeted policies to mitigate the distributional consequences of capital deepening and technological change. • The EU productivity–wage gap widened between 2002 and 2018. • Falling labor shares are the main driver of the decoupling. • Higher tangible capital intensity reduced the labor shares of lower-skilled workers. • Weaker labor market institutions have further amplified the decline. • Effects differ by asset type, industry, and skill level, requiring targeted policy.