Workers are getting a shrinking slice of America’s economic pie

By Alicia Wallace, CNN

(CNN) — The US economy continues to grow at a relatively healthy pace, but American workers aren’t fully reaping the financial rewards.

In fact, American workers’ piece of the economic pie is shrinking. By one official measure, their slice is the smallest in almost 80 years.

The labor share of income, which is the amount of economic output paid to workers as compensation, fell to 52.8% earlier this year, Bureau of Labor Statistics data shows. That’s the lowest-ever level, according to BLS records that go 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, chief economist at Navy Federal Credit Union. “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 labor share of income, as measured by the BLS, has been on a bumpy decline since the rise of personal computing more than a quarter-century ago.

But this year, that drop-off was more pronounced – a likely reflection of the massive investment and rapid adoption of artificial intelligence technologies as well as a sign of what could come, Long said.

“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 expected effects of AI, it’s possible that the BLS measure could fall below 50% by the end of the decade, noted Michael Feroli, chief US economist at JPMorgan.

Other measurements show a less stark drop

Economic data is rarely clean-cut and, by some measurements, the outlook isn’t as dire as the BLS dataset seems – especially when considering factors such as depreciation, taxes, equity compensation, and the rise of pass-through corporations.

Goldman Sachs economist Abhay Duggirala estimated that 40% of the 7.5-percentage-point drop in the labor share of income since the 1990s can be attributed to three factors:

• First, tax law changes that prompted more businesses to organize as pass-through entities resulted in wages being recharacterized as tax-advantaged business profits.
• Second, greater reliance upon short-lived goods like computers and software has resulted in higher rates of depreciation. Those and taxes are not subtracted out of gross measurements of economic activity.
• Third, the BLS measure understates some forms of incentive and equity-based pay.

The remaining 60% of that increase is a result of higher markups, a greater industry concentration, the rise of automation and a decline in labor’s bargaining power, Duggirala wrote 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 labor share of income remains within historical levels.

Workers earn about half of every dollar of gross income; however, much of what is counted in gross income does not accrue to anyone, said Richard DiSalvo, senior economist at the Tax Foundation.

A more appropriate method is to use the share of net income accruing to capital, he said. By those measurements, capital’s share is between 22.6% and 31.7%, not 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.

A slow-moving phenomenon with real consequences

Still, any decline in labor’s share of income is worth highlighting, especially in the context of a technological revolution, said Gregory Daco, chief economist at EY-Parthenon.

“The economy is continuing to grow at a relatively robust pace, but not everybody is sharing that growth equally,” he said.

Corporations’ profit margins (particularly those tied to the AI revolution) are hitting historical highs; and, at the same time, business leaders’ ongoing cost-control efforts and workers’ declining rates of bargaining power have further capped the labor income share, Daco said.

“It’s a slow-moving phenomenon but one that has real consequences in terms of consumer spending and consumer sentiment,” he said.

For example, a return to a 56% labor share in an economy generating $23.6 trillion in inflation-adjusted gross domestic income would translate to an increase of $3,900 per household, Daco said. 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 labor share are real, said Navy Federal Credit Union’s economist Long, noting the potential for greater 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 circling the drain for much of this year as a war-driven spike in gas prices and concerns about AI’s potential negative effects on the labor market have further compounded affordability concerns.

Inflation, which has been elevated for more than five years, has heated up in recent months. That prompted the Federal Reserve to raise rates for the first time in three years, making borrowed money even more costly.

Fed policymakers meet this week and are expected to hold rates steady.

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