ROI-Can productivity boom lift US workers' record low share of GDP? Unlikely: McGeever

By Jamie McGeever

ORLANDO, Florida, Feb 11 (Reuters) - U.S. labor's share of national income has fallen to 53.8%, the lowest since records began. Those hoping that strong, accelerating productivity growth might improve workers' lot are likely to be disappointed.

The benefits of cost savings and efficiency gains generated by any incipient artificial intelligence boom are more likely to flow to companies and shareholders, with workers' share of the country's economic pie shrinking further.

This has potential knock-on consequences for economic activity, should weaker household income growth undermine consumer spending, which makes up around 70% of U.S. GDP.

This may not be felt immediately. Household balance sheets are still strong, as rising asset prices have increased people's overall net worth. This has helped sustain consumption even as company hiring has slowed and the unemployment rate has risen to a four-year high.

But consumers are drawing down savings to fund their spending. The personal savings rate is now 3.5%, the lowest in more than three years.

While the wealthiest, asset-rich Americans may account for the bulk of household spending, they aren't responsible for all of it – and those consumers not in the top income decile may increasingly find their ability to spend curtailed.

More worrying, perhaps, is the political and societal impact of a continued decline in workers' share of gross domestic product. The political climate across the country is already febrile and social tensions are taut.

Affordability issues dominated mayoral and gubernatorial elections last year and will be pivotal to the mid-term elections in November too - and likely well beyond that.

"However 'good' the macro data look, large parts of the population may not be feeling the benefits. That's a major political challenge - one that's likely to influence U.S. election cycles for years to come," Deutsche Bank's Jim Reid writes.

GAP IS NOW A CHASM

These trends are not new, of course. Labor's share of U.S. national income has been steadily shrinking for years, a shift that accelerated notably around the turn of the millennium.

Analysts at the Economic Policy Institute say the tide really started to turn against labor and in favor of capital some 45 years ago, when the "productivity-pay gap" began to widen. Between 1980 and 2025, productivity rose more than 90% while hourly pay rose only 33%, meaning productivity grew 2.7 times faster than wages. That gap is now a chasm.

There are three key structural forces that help explain this shift: weaker employee bargaining power, technological changes, and globalization. The last of those is losing steam, but not enough to reverse labor's dwindling share of GDP.

There's also little indication that trade union membership is about to rebound, especially with the labor market so fragmented. Physical offices and factories are on the decline, millions of people work remotely, and part-time, freelance, and contract work are on the rise.

Could an AI-driven productivity boom stop the rot?

In theory, yes. Rising productivity generates more income for companies, which can be funneled into higher wages for employees. As PIMCO's Tiffany Wilding notes, AI could lower prices in key sectors like healthcare and business services, boosting real incomes even if nominal wages don't surge.

But there's another scenario, where tax incentives, government trade policy and the AI arms race push capital-intensive firms into investing more on technologies that reduce head count and labor costs.

We may be seeing that play out right now. Amazon and other big firms are firing tens of thousands of workers. While it's unclear how much of that is related to AI, this is occurring as just four "megacap" tech firms, including Amazon, have committed to spend around $650 billion on AI this year alone.

"AI can either substitute or complement, depending on adoption patterns. Without supportive institutions, much of the productivity windfall could accrue to capital owners, reinforcing the trend of a declining labor share," Wilding says.

If that occurs, who will consume all the goods and services the AI-driven economy is set to create? That could be the trillion-dollar question.

(The opinions expressed here are those of the author, a columnist for Reuters)

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