In recent years, a number of countries have undergone substantial reforms of their labour market institutions. Often, this involved reductions in the level or duration of unemployment benefits. For example, in Germany unemployment benefits used to amount to 67% of the last net income and were paid up to 32 months. Thereafter, the unemployed would receive an unlimited assistance of 57% of their last net income. In 2005 this was substantially changed with the so-called Hartz IV legislation. Now, unemployment benefits are paid only for up to 12 months. Thereafter, the unemployed receive a fixed payment that does not depend on the previous wage and equals the payment to those people that have never worked. Other countries have implemented similar reforms that reduced unemployment benefits. In addition, many other laws and regulations governing national labour markets have changed. For example, in some countries dismissal procedures have been loosened or the probation period have been lengthened and/or conflict resolution mechanisms have evolved. All these reforms have been perceived by unions and the public at large as a weakening of the bargaining power of the labour force.

During the same period and contrary to conventional wisdom, labour shares in all the OECD countries (except Switzerland) have been decreasing for the last quarter of a century (see e.g. Blanchard 1997 and 2006). In some case, the reductions have been very substantial. The existing literature offers some explanations of the phenomenon based on technological advancement. However, some studies point to a parallel and puzzling evolution of the efficiency unit of labour per capital. This project aims at addressing this puzzle.