What is wage share?

The wage share (LQ) is a key figure from economics and stands for the share of national income that is formed solely by employee wages and is therefore a measure of income distribution in functional terms. Depending on whether taxes and social security contributions are taken into account in the calculation, a distinction can be made between the net and gross wage ratios.

In this lesson you will learn how the wage share is calculated and what informative value it is. In addition, for the purpose of illustration, we will look at the development of the wage share in Germany. You will then have the opportunity to check your knowledge with a few exercise questions.

English: Wage share

Why is the wage share important?

As an economic indicator, the wage share gives you an insight into the status and development of an economy. It can therefore be relevant to a decision to know a country’s wage share. It can also be an indicator of whether there is a fair distribution of income in a country, because it shows the share of workers and employees in the income of the entire population.

How meaningful is the wage share?

According to nonprofitdictionary, the macroeconomic wage share is ascribed only relatively little informative value. A disadvantage of this key figure is that the income of self-employed workers and freelancers is not taken into account.

Why is the wage share only of little informative value?

Shifts between employees and self-employed have a corresponding effect on the wage share. The same applies to profits from capital income, rentals and other sources that do not result from an employment relationship. Mixed forms are also not taken into account, i.e. employees who run their own business on the side, such as B. bring in small business owners or profits from a stock portfolio.

Formula: Calculation of the wage share

The wage share includes all income generated from employment. The sum of these incomes is then divided by the total national income.

wage share

Expressed as a formula, it looks like this:

or

If the wage share is to be output as a percentage, the result from this division is simply multiplied by 100. Depending on whether gross or net wages are used in this calculation, the result is the gross wage quota or the net wage quota.

Calculation of the adjusted wage share

The changes in the structure of the labor force already mentioned above are corrected using the adjusted wage share (bLQ). In order to achieve this, the number of both employed and dependent employees must be standardized to a base year.

In addition to this base year, the wage share for the reporting year is then determined. The informative value of the adjusted wage share, however, depends on which year is selected as the base year. It is more suitable for depicting changes in the distribution between wage and profit income.

Development of the wage share in Germany

The wage share in Germany is regularly determined by the Bundesbank on the basis of data from the Federal Statistical Office.

Since the beginning of the post-war period, the value has risen continuously, from around 65% in 1970 to the all-time high of 73.6% in 1981, which is still valid today. It fell to 67.8% by 1990, and then returned to this level to stagnate. Neither adjusted nor unadjusted wage share have shown any significant changes since then.

 

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