Rio, Fernando delRebelo, Francisco2025-09-222025-09-222025-09-01Rio, 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.2025.08.0442204-229606a4b68e-cb7e-4c29-a9d1-1ac186266aa8http://hdl.handle.net/10400.14/55055We 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.engCapital deepeningCapital efficiencyElasticity of capital-labour substitutionFirm labour wedgeLabour shareTechnical changeresearch article10.1016/j.eap.2025.08.044001565525000002