Profits Are Soaring. Workers’ Share of Income Is Sinking.
· Jacobin
Outside periods of recession, the public mood has rarely been as downbeat about the economy as it is today, with consumer confidence at a historic low and polls recording a deep pessimism about where things are headed. Against this backdrop, political and business leaders are touting an economic “golden age,” pointing to solid growth, stable unemployment, record profits, and a stock market that seems to only go up. The vibes on Main Street are gloomy, but on Wall Street they are nearly euphoric.One way to understand this growing disconnect between everyday people and elites is to examine how today’s celebrated gains are distributed across the economy compared with earlier periods. To do that, economists typically look at the national income and how much of it goes to workers — the “labor share” — versus the portion that flows to capital in profits and rents. (Together labor and profits make up roughly two-thirds of gross domestic income; the remaining third is absorbed by rents, taxes, and a mix of other smaller categories.)The US Bureau of Labor Statistics (BLS) tracks the labor share of the nonfarm business sector (the private economy minus agriculture) with quarterly data going back to 1947. For most of the twentieth century, that share was remarkably stable: it rose during recessions, as business income fell, and it declined as companies regained profitability, yet it never dropped below 60 percent and averaged around 63 percent. Labor’s consistent capture of about two-thirds of the national income was, in the words of John Maynard Keynes, “one of the most surprising, yet best-established, facts in the whole range of economic statistics.”This historical pattern began to shift around the turn of the century. After peaking at 64 percent during the 2001 recession, the labor share began a long slide, falling below 60 percent for the first time in 2004 and staying there ever since. More recently, this long-term decline has accelerated. In September, the BLS announced that the labor share had dropped to its lowest level on record for the fourth quarter in a row.The labor share now stands at 52.8 percent, more than ten points below its twentieth-century average. The downward trajectory coincides with rising profits across corporate America. As a share of gross domestic income, corporate profits are now the highest they’ve been since the early 1950s — at a time when hourly wage growth has cooled to a five-year low and is now well behind inflation.Economists have offered many explanations for this trend. In a 2021 paper, Gene M. Grossman and Ezra Oberfield reviewed the vast literature on the subject and compiled the most commonly cited culprits, including technological change and automation, globalization and neoliberal trade policies, deindustrialization, increasing market concentration, the decline of unions, and more.Beyond these structural causes, others have pointed to shifts in how some business owners and executives report their income. According to research by economists Matthew Smith, Danny Yagan, Owen Zidar, and Eric Zwick, roughly a third of the decline in the corporate sector’s labor share between 1978 and 2017 can be attributed to changes in how business owners pay themselves and how this income is recorded in the national accounts. They largely attribute this change to the Tax Reform Act of 1986, which encouraged firms to organize as “pass-throughs” and their owners to take income as profits rather than wages. Among pass-through firms owned by the top 1 percent, the owners’ share of value added rose from 37 percent to 48 percent between 2001 and 2014, a gain that came at the expense of their employees.The different theories of labor’s declining share are often framed as rival explanations. In practice, they’re pieces of the same political-economic shift. The neoliberal turn of the late 1970s ushered in a new era of shareholder capitalism, which made maximizing shareholder returns the organizing goal of the corporation. To deliver those returns, America’s business leaders waged a broad assault on the labor movement, using every lever available to curb worker power. Technology, globalization, and union busting all operated through the same channel toward that end.This reality has led some economists to put forward a more “unified explanation,” one that identifies the decades-long erosion of worker power as the root cause of labor’s dwindling share.The Hidden WedgeDramatic as it is, the labor share decline understates how much income has moved away from ordinary workers over the last forty years, because it tells us nothing about the vast inequalities hidden within the labor share itself.According to research by economists at the Economic Policy Institute (EPI), nearly 80 percent of the productivity-pay gap — the widening gulf between productivity growth and pay gains for nonsupervisory workers — has been driven by inequalities within the labor share, with the shift toward capital accounting for the remaining 20 percent. Before 1979, wage growth for the vast majority of workers tracked closely with productivity gains and with the growing compensation of high-income earners. Since then, most of the gains from productivity have flowed to top earners and shareholders.EPI’s analysis shows that the bottom 90 percent of workers captured nearly 70 percent of all earnings in 1979, while the top 1 percent of earners took in a little over 7 percent. By 2021, the share of the bottom 90 percent had fallen by more than eleven points to 58.6 percent, while the top 1 percent of earners had doubled their share to nearly 15 percent — the highest point since the data became available in 1937. This trend was even more pronounced for the top 0.1 percent, whose share of earnings more than tripled, from 1.6 percent to 5.9 percent. Subtract the top 1 percent’s earnings, and the labor share falls well below its current historic low, by a much wider margin than in the past.In an email, EPI Chief Economist Josh Bivens told Jacobin that the fall in the labor share and the growing inequality within it both stem from excess employer power in the labor market and decades of wage suppression. “Basically, I think a set of policies aimed at wage suppression have successfully slowed wage growth for the vast majority of workers,” Bivens said, “and this left a large and growing ‘excess’ wedge of income that went to much more privileged actors in the economy.”Before 2000, most of this excess wedge showed up as rapid pay growth at the top of the income scale; during that period, as Bivens put it, “there was not a huge shift in the labor/profit shares.” Instead, top executives like General Electric CEO Jack Welch, poster boy of the shareholder revolution and ruthless union-buster, saw their pay explode. Between 1978 and 2000, the CEO-to-worker pay ratio at America’s top companies ballooned from under 25-to-1 to nearly 400-to-1.Since the turn of the century, the excess has flowed more directly from labor to capital. “Post-2000, you see less of a wedge in pay growth between the very top and typical workers (still a big one, just not as big), but you start to see a noticeable rise in the profit share,” Bivens said. Part of this reflects changes in how business owners and executives report their income. The post-2000 shift away from labor coincided with a time when “a bunch of tax policy and regulatory policy changes made it more advantageous for super-privileged actors (corporate executives mostly) to report their income in forms that don’t show up in the labor share but do show up in the profit share.”But reclassification explains only part of the shift. Profits also claimed a genuinely larger share of what the economy produced, boosting stock prices along with them.Whether it flowed to executives or shareholders, this redistribution of income has been a driving force behind the rapid growth of both income and wealth inequality over the last half century. As Bivens and EPI President Heidi Shierholz point out in a recent essay, estimates suggest that “anywhere from 40 percent to nearly 100 percent” of the nominal gains in the stock market since 1989 can be attributed to capital’s growing share of the national income.The implication, they write, is clear: “The wage suppression of recent decades is not just by far the biggest driver of the rise in income inequality; it is also by far the biggest driver of the rise in wealth inequality.”Labor and the AI BoomThe recent acceleration in the labor share’s decline has unfolded alongside an explosion in corporate profits and the strongest stock market bull run since the dot-com era. Yet these surging profits and asset prices have been driven less by genuine productivity gains than by financial speculation and a series of market shocks — from the supply-chain disruptions of the pandemic years to the recent spike in energy costs triggered by the Iran war.Apart from these disaster-driven profits, the stock market boom has been powered by a handful of superstar companies concentrated in the tech sector. The top ten companies listed on the S&P 500 now make up roughly 40 percent of the index’s total market cap and generate over a third of its earnings, buoyed by the debt-fueled artificial intelligence boom.These record profits are unlikely to last. If the current AI boom goes bust, as a growing number of market watchers now believe it will, earnings will plummet, and the profit share will decline relative to labor. But workers, not shareholders, invariably bear the brunt of recessions. Labor currently has little to gain and much to lose from the breakneck development of AI, especially if it proves as disruptive to jobs as many economists and AI boosters predict. Yet workers have even less to gain from a recession triggered by the collapse of the AI bubble, which would create ideal conditions for capital to further discipline labor — this time with some of the shiny new AI tools developed over the last several years.The path to avoiding these outcomes and reversing the long-term decline of the labor share lies in a revitalized labor movement. As long as labor is weak and fragmented, workers will continue to see their share of the economic pie contract as billionaires and CEOs reap the rewards of the new AI economy.The recently reelected president of the United Auto Workers (UAW), Shawn Fain, wasn’t being hyperbolic this June when he described the development of AI and the push for mass automation as a “profound threat and challenge to our way of life.” The compounding threats that workers now face have, in turn, increased public support and sympathy for labor unions. In September, Gallup’s annual survey on the labor movement showed that more than seven in ten Americans now approve of unions — the highest level since the 1960s — along with a record-high plurality of 47 percent who say that unions should have more influence.Fain is among a cohort of new labor leaders who have pushed for a bolder and more combative labor movement willing to take the fight to capital. The UAW’s successful “stand-up strike” against the Big Three automakers in 2023 was part of a new wave of labor action in the post-pandemic years. New organizing efforts have also helped to slowly reverse the long-term decline in unionization, with data from the BLS showing the number of workers represented by unions rising to a sixteen-year high in 2025.Whether the labor movement can sustain its current momentum is far from certain. What is clear is that its strength and influence will need to grow substantially in the years ahead if it is to meaningfully shape the emerging AI economy and shift the balance of power back toward workers. Until then, the economic gains touted by political and industry elites will almost certainly continue flowing straight to the top.This article originally appeared in Jacobin, a democratic socialist magazine publishing long-form essays and analysis on politics, economics, and culture. Subscribe to the print edition for $20 a year.
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