Loading...
Publication
OECD labour share trends: factor efficiency vs. market distortions in a neoclassical framework
| Name: | Description: | Size: | Format: | |
|---|---|---|---|---|
| 7.91 MB | Adobe PDF |
Authors
Advisor(s)
Abstract(s)
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.
Description
Keywords
Capital deepening Capital efficiency Elasticity of capital-labour substitution Firm labour wedge Labour share Technical change
Pedagogical Context
Citation
Rio, F. D., & Rebelo, F. (2025). OECD labour share trends: factor efficiency vs. market distortions in a neoclassical framework. Economic Analysis and Policy, 87, 2554-2591. https://doi.org/10.1016/j.eap.2025.08.044