Workers are earning a smaller and smaller share of the economy’s income. Their cut — referred to by economists as “the labor share” — has been falling for decades. And it’s getting worse. During the past few years, it declined at a rapid clip and is now at its lowest level on record — about 53 percent of income, down from about 65 percent after World War II.
Many policymakers blame industry consolidation and corporate greed for keeping a lid on workers’ compensation. Sure enough, there are now only three large wireless companies and four major airlines; Google dominates search. Corporate profits as a share of G.D.P. just reached a record high. When the share of income paid to capital — interest, rent, profits and dividends — rises, the labor share necessarily falls.
Given that diagnosis, the prescription might seem to write itself. Senators Bernie Sanders and Elizabeth Warren and others on the left argue for breaking up large firms, particularly in tech. So do Senator Josh Hawley, Vice President JD Vance and others on the right. The impulse to rein in corporate giants isn’t limited to the United States. Regulators in Europe, Japan and Britain are also supercharging their competition policy and stepping up enforcement.
That may be the wrong solution, because it’s not rising market power, but new technology — A.I. being the latest example — that is probably the most important force reducing the labor share. Breaking up big companies won’t help restore labor’s share and may not help workers at all. Designing policies for a change this significant requires understanding the real cause.
A little over a decade ago, Loukas Karabarbounis and I documented a global decline in the labor share. Labor shares stood well below their historical values in the United States and in most places we looked. That included advanced economies such as Germany and Japan where labor laws or unions were strong, and developing countries where they were not, such as China and India. Since the decline was generally largest where the price of computing and communications equipment fell most, we concluded that replacing workers with machines in production — substituting capital for labor — was bringing the labor share down.
At the time, our findings were controversial. Standard textbooks and economic models treated a stable labor share as a law of nature. Earlier in the 20th century, the labor share was indeed surprisingly steady — the great economist John Maynard Keynes called this stability “a bit of a miracle.”
Following our work, other academics began to offer their own explanations for why the labor share had declined. For instance, housing got more expensive and generated more rental income for owners. In 1999, government statisticians changed how they counted expenditures on software, and in 2013 expanded that treatment to research spending. And U.S. tax law increasingly encouraged small-business owners to pay themselves with profits rather than wages. All these circumstances affect the measured labor share.
But none of those theories can explain why the decline showed up both outside the United States and inside the Fortune 500, where many of those housing and tax issues are minimized. Perhaps for that reason, more blame has gone to higher markups, profits and market power.
As we later showed, though, inferring market power from accounting data on profits is tricky. Consider a firm that produces furniture. It employs workers, who make products in a factory. If the firm rents its factory and equipment, then reported profits equal whatever money is left from sales after spending on materials and after paying labor and the landlord. If the furniture company owns its factory and equipment, as most do, reported profits will be higher because they include the rent the firm is effectively paying to itself. There are lots of ways that profits could vary even though the factory does essentially the same thing. It is hard to identify the cause.
While we can debate about what macroeconomic forces landed the most blows to the labor share over the past five decades, when it comes to the last five quarters, technological change has to be a leading contender in explaining its rapid decline. Anyone who has used ChatGPT can see how much work now done by people could soon be done by technology. If A.I. substitutes for labor as quickly and broadly as some predict, the strain from lost jobs and upended careers could eclipse anything in recent memory. Some workers will gain, but many others, including those lacking capital income, will struggle. Unemployment will be a key number to watch.
If the labor share is falling because of a decline in competition, antimonopoly policy would indeed be the right medicine. But if, as I believe is likely, A.I. is the key force that continues to drive the labor share lower, our focus should be elsewhere. Stronger policies that cushion job losses and speed up retraining will be essential.
We will also need to reduce the bias toward capital income in the tax code. For example, firms that immediately write off the expense of machine purchases shouldn’t be allowed to fully deduct the interest on the loans they used to fund them. And capital gains on investments shouldn’t escape taxes simply because those investments are passed on to heirs. Oddities such as these lower the cost of capital, which further encourages the shift away from labor.
The overall scale of the social safety net could be indexed to trends in the labor share — expanding the net as labor share falls. Taxpayer-funded accounts, seeded at birth and invested in broad equity indexes, would also help. The new Trump Accounts move in this direction, but to narrow wealth gaps and limit strain on the budget, the deposits should flow to children in the neediest families.
Keynes’s “miracle” is over. We shouldn’t expect antitrust law to deliver another one. That’s just not feasible. The machines will keep getting better and are likely to claim ever more of the nation’s income. We can fight that and end up worse off — or we can make sure more people claim a share of the benefits.
Brent Neiman is a professor of economics at the University of Chicago. He served from 2023-2025 as the assistant secretary for international finance at the U.S. Treasury.
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