Workers are receiving a smaller portion of America’s economic pie
The US economy continues to expand at a relatively robust rate; however, American workers are not entirely benefiting from the financial gains. In fact, the share of American workers in the economic pie is diminishing. According to one official measure, their share is the smallest it has been in nearly 80 years. The labour share of income, defined as the proportion of economic output allocated to workers in the form of compensation, declined to 52.8% earlier this year, according to data from the Bureau of Labour Statistics. That represents the lowest level ever recorded, based on BLS data dating back to 1947. “It’s really telling you that workers have less and less power in this technology age and certainly in the AI age,” said Heather Long. “The rewards, the financial gains, are mainly going to shareholders, to the owners of the capital and less and less to your typical W-2 worker.” The labour share of income, as measured by the BLS, has experienced a volatile decline since the advent of personal computing over twenty-five years ago.
However, this year, the decline was notably more significant – likely indicative of the substantial investment and swift integration of artificial intelligence technologies, as well as a precursor to future developments, according to Long. “This is the chart that keeps me up at night,” she said. “I think people in the AI age will still have jobs, but they are not going to reap many of the financial benefits.” Given recent trends and the anticipated impacts of AI, it is conceivable that the BLS measure may decline to below 50% by the decade’s conclusion, as observed by Michael Feroli. Economic data is seldom straightforward and, by certain metrics, the forecast is not as bleak as the BLS dataset suggests – particularly when taking into account elements like depreciation, taxes, equity compensation, and the emergence of pass-through corporations.
Economist Abhay Duggirala estimated that 40% of the 7.5-percentage-point decline in the labour share of income since the 1990s can be attributed to three factors:
- Initially, modifications in tax legislation that encouraged a greater number of businesses to structure themselves as pass-through entities led to the reclassification of wages as tax-favored business profits.
- Second, an increased dependence on ephemeral products such as computers and software has led to elevated depreciation rates. Those and taxes are not deducted from gross measurements of economic activity.
- Third, the BLS measure fails to fully capture certain types of incentive and equity-based compensation.
The remaining 60% of that increase is attributed to elevated markups, increased industry concentration, the advancement of automation, and a reduction in labor’s bargaining power, as noted by Duggirala in a research note last month. “If these structural trends continue, for example because AI is likely to automate many additional tasks, the labor share will likely continue to decline,” he wrote. A separate tabulation from the Tax Foundation, which excluded components such as depreciation and taxes, found that the labour share of income remains within historical levels. Workers earn approximately fifty cents of every dollar of gross income; however, a significant portion of what is included in gross income does not benefit anyone, stated Richard DiSalvo. A more appropriate method is to utilise the share of net income that accrues to capital, he stated. According to those measurements, the share of capital is between 22.6% and 31.7%, rather than being half. “While we’re not disagreeing with the fact that [the labor share] has declined in the last 20 years, what we’re disagreeing with is it hasn’t marched off the charts like it shows in the BLS data,” he said.
Any decline in labor’s share of income is noteworthy, particularly against the backdrop of a technological revolution, according to Gregory Daco. “The economy is continuing to grow at a relatively robust pace, but not everybody is sharing that growth equally,” he said. Corporations’ profit margins, especially those associated with the AI revolution, are reaching historical highs. Concurrently, the persistent cost-control measures implemented by business leaders, coupled with the diminishing bargaining power of workers, have further constrained the share of income allocated to labour, according to Daco. “It’s a slow-moving phenomenon but one that has real consequences in terms of consumer spending and consumer sentiment,” he said. For instance, a reversion to a 56% labour share in an economy producing $23.6 trillion in inflation-adjusted gross domestic income would result in an enhancement of $3,900 per household, according to Daco. A return to the early 2000s levels near 62% would imply a $14,400-per-household boost, he added.
The implications for a further declining labour share are significant, according to Navy Federal Credit Union’s economist Long, who highlighted the potential for increased dissatisfaction among households. “It’s a pretty dramatic change, and people feel that,” she said. “It’s wrapped up in this rise of populism; it’s wrapped up in the affordability concerns; it’s wrapped up in the top 1% getting further and further away from everybody else.” Consumer sentiment has been deteriorating throughout this year, influenced by a war-induced surge in petrol prices and apprehensions regarding the adverse impacts of AI on the labour market, which have exacerbated affordability issues. Inflation, having remained elevated for over five years, has intensified in recent months. That prompted the Federal Reserve to raise rates for the first time in three years, increasing the cost of borrowing.
