US Daily What Explains the Decline in the Labor Share of Income

Economics Research 15 September 2026 | 9:11PM EDT

US Daily: What Explains the Decline in the Labor Share of Income?

n The labor share of income in the nonfarm business sector has declined about Abhay Duggirala | 7.5pp since the 1990s. On the face of it, this suggests that the gains from growth Goldman Sachs & Co. LLC and new technology are increasingly accruing to capital rather than labor. In today’s Daily, we ask how much of this decline reflects measurement issues unrelated to the distribution of income and how much reflects a true decline in labor’s share of income.

n We find that roughly 40% of the decline can be attributed to three factors that do not reflect a genuine shift in the distribution of income between capital and labor. First, tax incentives have led to a shift toward using pass-through corporations to report income that used to be classified as wages as business profits instead. Second, as short-lived capital goods like computers and software have become a larger part of the capital stock, the overall depreciation rate has increased, which depresses the labor share without implying that more income is accruing to capital owners. Third, equity compensation now accounts for a larger share of high-skilled workers’ total compensation but is not fully captured in the labor share.

n The remaining 60% of the decline, roughly 4.5pp, looks genuine, and we attribute it primarily to three overlapping structural factors. First, rising markups, in part reflecting the growing dominance of high-performing, less labor-intensive “superstar” firms, have led to a smaller share of value added going to labor. Second, automation has raised the capital share by reducing the need for labor in the production of both goods and services. Third, a decline in labor’s bargaining power related to globalization, de-unionization, and corporate concentration has likely contributed as well. If these structural trends continue, for example because AI is likely to automate many additional tasks, the labor share will likely continue to decline.

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to

What Explains the Decline in the Labor Share of Income?

The labor share of income in the nonfarm business sector has declined roughly 7.5pp since its 1990s average (Exhibit 1). On the face of it, this suggests that the gains from growth and new technology are increasingly accruing to capital rather than labor.

Exhibit 1: The Labor Share of Income Has Declined 7.5pp Since the 1990s After Many Decades of Stability

Percent Nonfarm Business Labor Share Percent

Note: The BLS nonfarm business sector labor share is calculated as labor compensation divided by gross value-added, which includes depreciation.

Source: US Bureau of Labor Statistics

But the decline in the labor share likely overstates the shift in the distribution of income between capital and labor for three reasons. First, research from Matthew Smith and coauthors shows that the 1986 Tax Reform Act, which raised the relative tax burden on C-corporations, prompted a shift toward pass-through organizational forms over the past few decades. As a result, income that used to be reported as wages and therefore part of labor compensation is now reported instead as tax-advantaged business profits.1

Second, depreciation and production and import taxes are components of gross value added, so as they increase, the labor share declines. But their increase does not imply that net income is shifting from labor to capital.2 As short-lived capital goods like computers and software have become a larger part of the capital stock and production and import taxes have increased, both the overall depreciation rate and the tax rate have risen, accounting for part of the decline in the labor share over the past few decades.

Third, the Bureau of Labor Statistics measure of labor compensation understates some forms of incentive pay. It only records equity pay at vesting or exercise rather than at grant, so measured amounts reflect awards made a year or more ago and understates current grants.…