Wages are making up a shrinking share of overall income

The Bureau of Labor Statistics will delay its release of monthly unemployment and wage data this week, thanks to the partial government shutdown. But even without government data, we’re already seeing signs that wage growth has been slowing.

One of those signs? Over the last several years, wages have been making up a shrinking share of the total income generated in this economy. 

There are basically two kinds of income, said Preston Mui, senior economist at the policy think tank Employ America.

“The income gets paid out to profits, so payments to shareholders, and the rest goes to employees,” Mui said.

Mui said the share that employees get as wages has been declining.

“It fell between 2020 and 2022, and it’s remained flat since,” Mui said. “And it’s at its lowest level in the past 50 years or so.”

Labor’s share of the country’s income has been declining for decades.

“People have offered explanations like decreased competitiveness in the labor markets, things like offshoring, the decline of unions,” Mui said.

Another explanation is that over the last several decades, workers have become a lot more productive. Courtney Shupert, an economist with the economic research firm MacroPolicy Perspectives, said wage growth hasn’t kept up with productivity growth.

“Part of that is because as industries have become more productive, they need fewer workers,” Shupert said.

Shupert said that’s what happened in the oil and gas sector after the fracking boom of the mid-2000s. Companies poured money into new equipment and other infrastructure, which allowed them to boost output and rake in more profits.

“And then if you look at their productivity and employment levels after that initial productivity boom, oftentimes you saw declining levels of employment years after that initial productivity surge,” Shupert said.

Workers do benefit from a more-productive economy. Peter Orazem, an economics professor at Iowa State University, said workers’ wages can buy more if productive companies can avoid having to raise prices.

“If you look at the long-term trends in labor productivity, some of that converts into suppressing the rate of increase in the prices of the goods that we consume,” Orazem said.

But if labor’s share of overall income continues to fall, consumer spending, which accounts for about two thirds of this economy, is going to be increasingly propped up by people who rely less on paychecks and more on income from stocks, real estate, and other investments.

“The folks who are more reliant on those are seeing pretty strong equity markets, decent rental income growth, and that means that their demand is stable to growing,” said Nicole Cervi, an economist with Wells Fargo.

Cervi said that means the spending gap between wealthier consumers and people with lower incomes will keep getting wider.