The Rising Dominance of Capital in the Modern Economy
A stark comparison between corporate giants of different eras reveals a profound economic shift. In 1985, IBM stood as America's most valuable company, highly profitable, and a massive employer with nearly 400,000 workers. Today, Nvidia's valuation is nearly 20 times higher and its profitability five times greater than IBM's, adjusted for inflation. Yet, Nvidia employs only about a tenth of IBM's workforce. This simple contrast underscores a critical reality: the rewards of today's economy are flowing disproportionately toward capital rather than labor.
The Decades-Long Shift from Labor to Capital
This transition has been unfolding for over four decades. In 1980, labor received 58% of the total proceeds from economic output, as measured by gross domestic income. By the third quarter of last year, that share had plummeted to 51.4%. Conversely, profits' share rose from 7% to 11.7% over the same period. Several factors have driven this change, including the decline of unions, the spread of outsourcing, and a fundamental shift in the nature of capital itself.
Businesses now invest less in long-lived assets like buildings and factories and more in computer equipment, software, and intellectual property, which require frequent replacement. Automation has played a pivotal role, particularly in manufacturing. In 1980, 66% of value added in factories went to labor as wages and benefits. By the 2000s, that figure had dropped to 45%. While this boosted productivity and lowered consumer prices, it meant many workers moved to lower-paid jobs elsewhere.
The Post-Pandemic Landscape and the Rise of Big Tech
The Covid-19 pandemic briefly reversed this trend as desperate employers bid up wages amid severe labor shortages. However, prices rose almost as much as wages, and profits quickly surged to new highs. Meanwhile, big tech companies expanded their influence, operating on fundamentally different business models. Their capital consists of algorithms, operating systems, standards, and vast user networks, not traditional factories or machinery.
Nvidia, for instance, designs but does not manufacture its products. The declining labor share is not primarily due to underpayment but rather a shift in the types of businesses dominating the economy. Today's fastest-growing "superstar" companies pay well but employ relatively few people. For example, Alphabet's revenue grew 43% over the past three years while its headcount remained flat. Amazon, a major employer due to its fulfillment centers, is also cutting jobs.
Winners and Losers in the Capital-Labor Divide
Since late 2019, just before the pandemic, workers have barely kept pace. After inflation, average hourly wages are up only 3%, and total compensation for workers in aggregate is up 8%. In contrast, profits have soared by 43%. Last year was decent for wages but even better for profits, with big tech's blowout earnings helping lift S&P 500 profit margins to their highest since at least 2009.
Rising earnings combined with higher price-to-earnings ratios have propelled the stock market. Households' stock wealth now equals almost 300% of their annual disposable income, up from 200% in 2019. For affluent households who own most stocks, wealth is starting to rival wages as a driver of consumption. A strategist estimates that a 10% stock return, including dividends, boosts spending capacity as much as an 18% rise in income, explaining why tepid job growth hasn't stalled the economy.
The Future: AI's Role in Intensifying the Trend
As big tech companies invest hundreds of billions in data centers, they may no longer be the cash cows Wall Street once loved. However, the long-term impact hinges on how customers use the AI models running on those data centers. AI is not just a substitute for specific jobs but a general labor substitute for humans, potentially leading to a world where large, labor-intensive enterprises are replaced by less labor-intensive startups.
Markets glimpsed this future recently when AI tools for tasks like writing legal briefs and synthesizing data tanked shares of specialized software companies. Economists predict that as companies integrate AI, a shrinking share of revenue will go toward labor, mirroring the factory automation of past decades. While workers in jobs requiring social skills, proximity, or manual labor may benefit, and consumers may enjoy cheaper products, the biggest winners will likely be shareholders, further entrenching the capital-labor divide.
