The labor share puzzle: Empirical evidence for European countries

Changes in labor share are documented in the literature, but its micro-sources remain unclear. At the macro level, the labor share is related to the capital-output ratio. Firm level evidence is scarce although very informative. In this paper we use microdata from European firms to study changes in labor share in 19 EU industries, over the period 2011-2019. Our results confirm that changes in firms' labor shares are related to these factors and that its decline has been accompanied by a reduction in capital accumulation, technological change and increasing markups. Further, we find heterogeneity among firms and show that the relationship between the labor share and the capital-output ratio is significantly nonlinear in many industries.