Labor’s share of national income is falling, capital’s share is rising, and why that matters
As I documented in my last primer, AI-related capital expenditure is now dramatically crowding out investment in almost every other sector of economy – especially housing construction and manufacturing. Furthermore, data centers are incredibly capital-intensive: that is, they deploy vast amounts of capital while employing very few people. A given amount of capital employs far more workers when used to construct a factory, an office building or even a distribution center. So when investment is diverted away from other sectors to AI, the overall demand for labor falls relative to what it would have been before the shift. Hence, the AI boom will depress the demand for labor in the economy.
Despite the recent panicked claims that AI will wipe out millions of jobs, the shift towards AI probably won’t lead to mass unemployment. However, it will lead to slower growth in wages. Conceivably, it could even lead to falling real wages. Moreover, this will happen in an economy that, for 25 years, has increasingly rewarded wealth rather than work. Even before the AI boom, the share of national income going to workers was falling rapidly. Thanks to AI, it is now on track to decline even faster.
If this sounds like a problem, that’s because it is. Yet it’s important to understand the nature of the problem. A crude Marxist might see the issue as simply one of competing classes — capitalists versus workers — and oppose anything that shifts the balance away from labor toward capital. And to be fair, there is something to be said for that view. Redistribution of income from labor to capital definitely leads to increased economic inequality and, potentially, challenges to democracy and social unrest.
A two-class model of the economy is, however, much too simplistic. That’s because neither workers nor capitalists are homogeneous classes. Far from it! And the lack of homogeneity among owners of capital, in particular, makes a falling labor share a bigger problem than it would be if all capitalists were alike. That’s because the shift of income toward capital also worsens the problem of oligarchy, the growing financial and political dominance of a small class of the extremely wealthy, which America is already suffering from. In other words, a falling labor share accelerates the downward spiral of the country into oligarchy.
Beyond the paywall, this primer will address the following:
1. The decline in the share of national income going to labor and why the aI boom will worsen that decline
2. How a falling labor share of national income increases overall inequality
3. The relationship between growing wealth inequality and oligarchy
4. What can be done?