Capital Composition and the Decline of the Labor Share: Why Buildings Matter

Overview

"Capital Composition and the Decline of the Labor Share: Why Buildings Matter," by Jacob Kerspien, Jakob B. Madsen, and Holger Strulik, appeared in the European Economic Review (vol. 184, 2026; article 105242; DOI 10.1016/j.euroecorev.2025.105242).[1] Constructing "annual macro data for 16 advanced countries over two centuries," the authors argue that "the decline in the labor share is not driven by the overall quantity of capital, but by its changing composition."[1] The mechanism is a factor-complementarity result: since 1980, "the relative decline in buildings capital and the associated increase in real prices of buildings have reduced the labor share because buildings and labor are complements," while the rise in machinery capital (a substitute for labor) reinforces the same trend.[1] "Together, these shifts in capital composition account for a substantial portion of the observed decline in the labor share of income."[1]

Why It Matters for the Capital-Share Debate

The paper is independent corroboration, from a new long-run dataset and a heavyweight team (Madsen is a leading long-run macro-growth empiricist), of the central empirical fact behind the wiki's capital-share-rise-is-land claim: the shift away from labor is bound up with the rising real value of real estate rather than with productive machinery. Where Rognlie (2015) and Knoll, Schularick & Steger (2017) show that the rise in the "capital" share and in real house prices is concentrated in housing and, within housing, in land, this paper adds the factor-share transmission channel: it is rising building prices, not the accumulation of reproducible equipment, that drags the labor share down.

Nuance and Limits

The paper's asset category is "buildings", and it does not itself perform a land-versus-structure decomposition of that rising building value. Its finding that the real price of buildings rose while the quantity of buildings capital fell in relative terms is exactly the pattern the land literature explains — appreciating real estate whose appreciation is overwhelmingly land, not construction cost (Knoll, Schularick & Steger) — but the "buildings are land" step is supplied by that companion literature, not by this paper. Read on its own, the paper establishes that real-estate price appreciation (not machinery accumulation) drives the labor-share decline; the further identification of that appreciation as land rent is the contribution of the decomposition studies it complements. Its machinery-substitution channel is also a genuinely distinct mechanism from the pure land story.

Bears On

• Outcome (supports): Most of the modern rise in the capital share is land, not capital — independent long-run (16-country, two-century) evidence that the factor-share shift tracks rising real-estate/building prices rather than the quantity of reproducible capital.
• Concept: Economic Rent · Unearned Increment.

See Also

• Rognlie (2015), Deciphering the Fall and Rise in the Net Capital Share — the housing decomposition this paper reinforces
• Knoll, Schularick & Steger, No Price Like Home — the land-vs-construction-cost split behind rising real building prices
• La Cava (2016) — the US income-side counterpart
• Most of the modern rise in the capital share is land, not capital

Sources

1. Jacob Kerspien, Jakob B. Madsen & Holger Strulik (2025/2026), "Capital composition and the decline of the labor share: Why buildings matter," European Economic Review, vol. 184, article 105242. DOI: 10.1016/j.euroecorev.2025.105242 — used for the paper's thesis (composition, not quantity, of capital drives the labor-share decline), the buildings-labor complementarity mechanism, the machinery-labor substitution reinforcement, and the 16-country/two-century data scope. Quotations (each under 50 words) verified verbatim against the published abstract (SSRN preprint DOI 10.2139/ssrn.5297889; UWA Research Repository record), fetched 2026-07-13.