This paper shows that the decline in the labor share over the last 30 years was not offset by an increase in the capital share. I calculate payments to capital as the product of the required rate of return on capital and the value of the capital stock. I document a large decline in the capital share and a large increase in the profit share in the U.S. non-financial corporate sector over the last 30 years. I show that the decline in the capital share is robust to many calculations of the required rate of return and is unlikely to be driven by unobserved capital. I interpret these results through the lens of a standard general equilibrium model, and I show that only an increase in markups can generate a simultaneous decline in the shares of both labor and capital. I provide reduced form empirical evidence that an increase in markups plays a significant role in the decline in the labor share. These results suggest that the decline in the shares of labor and capital are due to an increase in markups and call into question the conclusion that the decline in the labor share is an efficient outcome.
For the pointer I thank David Levey.