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In a simple static model of firm behaviour with imperfect competition on the product and labour markets, we show that firm heterogeneity in terms of technology, market power, capital, prices and wages affects the labour share. In particular, we show that if elasticity of substitution between capital and labour is below 1 (the empirically relevant case), an increase in between-firms wage dispersion decreases the aggregate labour share. We then provide a full statistical characterisation of the effect of heterogeneity in terms of the first moments of the joint distribution of these variables across firms, and quantify the relevance of each component in explaining the observed fall in the labour share in the UK using a rich firm-level dataset. Several other contributions arise from the paper, including an estimation of labour and product market power, and capital stock for UK firms.
