Deciphering the fall and rise in the net capital share

the the point you were most interested in, the life of assets having been shorted see top of page 6)"....Whether a gross or net measure is more appropriate depends on the question being asked: the allocation of gross value added between labor and gross capital more directly reflects the structure of production, while the allocation of net value added between labor and net capital reflects the ultimate command over resources that accrues to labor versus capital....For instance, in an industry where most of the output is produced by short-lived software, the gross capital share will be high, evincing the centrality of capital’s direct role in production. At the same time, the net capital share may be low, indicating that the returns from production ultimately go more to software engineers than capitalists—whose return from production is offset by a loss from capital that rapidly becomes obsolete..."Rognlie, Matthew, "Deciphering the fall and rise in the net capital share,"Brookings Panel on Economic Activity, March 2015. Available at:http://www.brookings.edu/about/projects/bpea/papers/2015/land-prices-evolution-capitals-share
"...First, it argues that as a purely descriptive matter,the recent behavior of income shares is widely misunderstood: rather than experiencing a steady rise, the net capital share for large developed economies has followed a U-shaped trajectory in the postwar era, and its long- term expansion originates entirely in the housing sector.Although both gross and net income shares can be meaningful,net concepts are more relevant to the debate on inequality.Second, this paper observes that when net capital income outside the housing sector is disaggregated between the return on fixed assets and a residual share of pure profits, the U-shaped trajectory is driven mainly by the residual—calling the mechanisms in Karabarbounis and Neiman (2014b) and Piketty and Zucman (2014), which rely on changes in the aggregate value of capital, into question. Finally, it describes the theory of factor shares and the role of elasticities of substitution, evaluating various hypotheses by performing counterfactual simulations in a multisector model.....This measurement reveals a striking discrepancy in the long-term behavior of gross and net shares, echoing the claims of Bridgman (2014); and it shows that the net capital share generally fell from the beginning of the sample through the mid-1970s, at which point the trends reversed. In the long run, there is a moderate increase in the aggregate net capital share, but this owes entirely to the housing sector—where, since ownership is less concentrated, the consequences for inequality may be less severe.In the shorter run, there is both the U-shaped pattern in capital income and a strong cyclical element...It starts by disaggregating net capital income in the corporate sector into components that reflect the return on fixed assets—equipment, structures, and land—as well as a residual term reflecting “pure” profits. Although the decomposition between return on assets and this residual can be somewhat ambiguous, both crude and more sophisticated approaches indicate that the residual plays a central role.To some extent, this residual reflects cyclical variation in markups, but its long-term pattern—which parallels the U-shaped pattern in capital income as a whole—may hint at broader changes in market power and the importance of monopoly profits....I note some intriguing shifts in composition: for instance,there has been a long-term shift in net capital income from land in the non-housing sector to land in the housing sector....Motivated by the limitations of a one-sector model, I construct a multisector model that reflects the disaggregation performed in section 3, and use this model (with a tentative calibration of elasticities) to perform counterfactual simulations that study the influence of key forces on the net capital share—including the observed changes in the relative price of various kinds of investment, and also changes in the real interest rate....For instance, in an industry where most of the output is produced by short-lived software, the gross capital share will be high, evincing the centrality of capital’s direct role in production. At the same time, the net capital share may be low, indicating that the returns from production ultimately go more to software engineers than capitalists—whose return from production is offset by a loss from capital that rapidly becomes obsolete.Both measures are important: indeed, a rise in the gross capital share in a particular industry is particularly salient to an employee whose job has been replaced by software, and it may proxy for an underlying shift in distribution within aggregate labor income— for instance, from travel agents to software engineers. The massive reallocation of gross income in manufacturing from labor to capital, documented by Elsby et al. (2013), has certainly come as unwelcome news to manufacturing workers. But when considering the ultimate breakdown of income between labor and capital, particularly in the context of concern about inequality in the aggregate economy, the net measure is likely more relevant. This point is accepted by Piketty (2014), who uses net measures; the general rationale for excluding depreciation is pithily summarized by Baker (2010), who remarks that “you can’t eat depreciation....As we increase capital relative to labor, the net marginal product of capital declines more rapidly than the gross—in short, capital is less substitutable for labor from a net perspective....” Mobile908.303.9747
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