Declining labor and capital shares

Barkai, S (2020) Declining labor and capital shares. Journal of Finance, 75 (5). pp. 2421-2463. ISSN 0022-1082

Abstract

This paper shows that the decline in the labor share over the past 30 years was not offset by an increase in the capital share. Capital costs are the product of the required rate of return on capital and the value of the capital stock, and the capital share is the ratio of capital costs to gross value added. The capital share is declining, driven by a large decline in the cost of capital. Measured in percentage terms, the decline in the capital share (30%) is much more dramatic than the decline in the labor share (10%). The profit share has increased by more than 12 percentage points. The value of this increase in profits amounts to over $1.1 trillion in 2014, or $14 thousand per employee. The decline in the capital share is unlikely to be driven by unobserved capital. In a standard model, a decline in competition is necessary to generate simultaneous declines in the labor and capital shares. A calibrated model shows that a decline in competition quantitatively matches the data. This paper provides reduced form empirical evidence that a decline in competition plays a significant role in the decline in the labor share. Increases in industry concentration are associated with declines in the labor share. These results suggest that the decline in the shares of labor and capital are due to a decline in competition and call into question the conclusion that the decline in the labor share is an efficient outcome.