Factor Income and the Euro Area Current Account

Vahagn Galstyan

No 8/EL/19, Economic Letters from Central Bank of Ireland

Abstract: The increase in the current account surplus of the euro area has been accompanied by muted growth in real wages and an increase in corporate profits. I show that these developments are linked. In particular, temporary shifts in labor income covary negatively with the current account, while permanent shifts show little correlation. On the other hand, temporary shifts in capital income covary positively with the euro area current account, while permanent shifts are marginally negatively correlated. With recent income dynamics likely being temporary in nature, the findings suggest that both external and internal imbalances could unwind simultaneously, were the upward pressure in the labor market to translate into a redistribution of corporate profits towards labor income.

Date: 2019-06
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