Estimating a simultaneous-equations spatial panel model of demand and distribution in the European Union, 1998–2024

Gilberto Lima and Andre M. Marques ()

No 2026_26, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: This paper estimates a simultaneous-equations model of aggregate demand and income distribution using spatial panel data for 27 European Union countries over 1998-2024. We reach the following findings. First, an increase in a country`s wage share has a significant negative effect on domestic capacity utilization and on capacity utilization in neighboring countries. Second, higher domestic capacity utilization significantly reduces the country`s own wage share while increasing neighboring economies` wage shares. Third, impulse response functions corroborate these short-run relationships. Fourth, although aggregate demand is predominantly profit-led in the short run, it becomes wage-led over longer horizons, particularly through the spillover effects of wage share on capacity utilization. Fifth, regarding indirect effects, higher wage share in neighboring countries reduces domestic capacity utilization in the short run but increases it over longer horizons. Conversely, higher neighboring-country capacity utilization initially reduces domestic wage share. However, this effect tends to reverse in the longer run.

Keywords: Wage share; capacity utilization; 3SLS estimation; SURE estimation; EU countries (search for similar items in EconPapers)
JEL-codes: C33 D33 F15 O10 (search for similar items in EconPapers)
Date: 2026-08-28
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