OECD labour share trends: Factor efficiency vs. market distortions in a neoclassical framework

Fernando Del Río and Francisco Rebelo

Economic Analysis and Policy, 2025, vol. 87, issue C, 2554-2591

Abstract: We find that, for the vast majority of the 29 OECD countries, capital efficiency has declined, while labour efficiency has increased. Moreover, capital and labour exhibit a relatively high degree of complementarity. On average, countries with a larger relative decline in capital efficiency have also experienced a greater decline in the labour share. This pattern is consistent with the neoclassical theory of functional income distribution: if capital and labour are gross complements, a decline in the relative efficiency of capital reduces the demand for labour, thereby lowering equilibrium wages and the labour share. In some countries — including the United States, the United Kingdom and Australia — this mechanism can accurately account for much of the observed evolution in the labour share, while in others — including the three largest European economies (Germany, France and Italy) — market frictions and distortions affecting labour demand have played a more prominent role. Policies aimed at halting the decline in capital efficiency, or mitigating market frictions and distortions, can therefore enhance productivity and support wage growth.

Keywords: Elasticity of capital-labour substitution; Labour share; Capital efficiency; Capital deepening; Technical change; Firm Labour wedge (search for similar items in EconPapers)
JEL-codes: E25 O33 O57 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:87:y:2025:i:c:p:2554-2591

DOI: 10.1016/j.eap.2025.08.044

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