Aggregate demand and developments in market power, labour share and inequality in Norway

Increased market power in the product and services market, a falling labour share and greater inequality are three global trends that have been defined as possible factors underlying weak demand. This report analyses developments in market power, labour share and inequality in Norway and the effects these factors have on overall demand.

A sign that market power has increased in many OECD countries is that the mark-up has increased over time. This report provides an analysis, based on developments in the mark-up, of changes in market power in Norway. Our analysis of the competitive situation shows that the aggregate mark-up in Norway has been relatively stable. In many OECD countries, the labour share has fallen over time. It has remained relatively stable for mainland industries in Norway, but adjustment for sole traders reveals a moderate falling tendency. Such a reduction in the labour share could potentially result in reduced consumer demand from wage-earners. At the same time, the reduction is most pronounced in industries in which the state receives a large share of profits either directly, through ownership, or indirectly through taxes. To the extent that this income is used for public investment and consumption, the reduction in demand due to a falling labour share will be curbed. The fact that both the mark-up and the labour share have been relatively stable since the mid-1990s therefore does not provide grounds for concluding that developments in the labour share and market power have reduced overall demand appreciably during this period.

The level of income inequality in many OECD countries, including Norway, has increased since the mid-1980s, but the increase in Norway has been moderate, viewed in a historical perspective. Greater inequality may affect overall demand, but the source of increased inequality has a bearing on the magnitude of the effect. Income inequality may increase as a consequence of higher income risk or of increased spread in permanent income. The analysis in this report indicates that it is mainly changes in permanent income that have led to greater inequality in Norway, but that this has only to a limited extent led to lower consumption and increased saving. There is therefore no basis for concluding that the moderate increase in inequality in Norway since the 1980s has resulted in significantly lower overall demand.

The KVARTS macroeconomic model is used to analyse how increased market power and falling labour shares may impact the Norwegian economy. Increased market power may be reflected in wider retail trade margins or increased market power in relation to vendors. Increased retail trade margins mean higher consumer prices, lower real wages, a reduced labour share and lower consumption. Increased market power in relation to manufacturing vendors, such as enterprises in the food industry, could result in lower profitability among these manufacturing enterprises. Because of the way in which the wage leader model functions, manufacturing might nonetheless be more competitive overall in the medium term. The report also analyses how the Norwegian economy could be affected if the inequality increases and the increased inequality is strongly reflected in consumption. Lower consumption due to increased inequality will result in lower demand, and hence lower investment, output and imports. Finally, the effects on the Norwegian economy of the fall in interest rates in the period 2011–2018 are analysed. The reduced interest rate contributed in isolation to output, measured as mainland GDP, being 2.1 per cent higher and employment almost 1 per cent higher in 2018.