Profits Up, Labor Share Down. Computers Why?

by Andrew McAfee on April 3, 2012

The Economist reports that US corporate profit margins are higher than they’ve been in 65 years, and absolute profits have reached unprecedented levels:

And how are the US workers who help generate these profits doing? Worse than ever, as measured by the nonfarm business sector’s labor share —    roughly speaking, the share of GPD going to wages

There are many reasons why labor share is going down as profits and profit margins rise. I believe that technology is one of the major ones. As Moore’s Law continues to spur digital innovation, companies throughout the economy buy computers and computer-controlled machinery to do things that people used to do. This makes capital’s share go up, and labor’s go down.

It also reduces the bargaining power of the remaining workers. If they and their bosses know that it’s getting easier, cheaper, and more feasible to replace humans with machines in more and more job categories, it becomes more difficult and risky to demand higher wages. So again, labor share goes down over time as computer power goes up.

These graphs are not evidence of some vast and orchestrated plot against workers. Instead, they’re just (I believe) evidence of how labor markets operate in an era of astonishingly powerful technology. And I have a lot easier time seeing how profits might fall in the future than seeing how labor share could substantially and sustainably rise.

Do you see things differently? Leave a comment, please, and let us know.


Francesco De Collibus April 3, 2012 at 6:13 pm

I think your analysis could be right

Francesco De Collibus April 3, 2012 at 6:15 pm

I think your analysis is right only considering a global scale. About the US data, I am afraid it’s more the impact of cheaper workforce in other countries…

Jed Harris April 3, 2012 at 8:24 pm

The pressures on workers (and work) from these trends seem to be already severe and growing almost without bound.  The proposals at the end of Race Against the Machine aren’t really adequate to address this, even today, but especially projecting out the exponential trends a bit.  

Race Against the Machine was already a shift for you away from a more conventional perspective (as you say in the last chapter).  It seems like you are shifting further toward seeing this as a really major transition.

I’d like to see us keep the bottom-up entrepreneurial energy and
flexibility of the marketplace.  But it seems like the marketplace for
labor isn’t going to be a good basis for distributing income, going forward. 

What are your thoughts about how we can or should handle this?  It doesn’t seem like responses within the current framework are anywhere near adequate.  What kind of policy would be appropriate? 

Fredrik Matheson April 4, 2012 at 12:59 pm

 “If they and their bosses know that it’s getting easier, cheaper, and
more feasible to replace humans with machines in more and more job
categories, it becomes more difficult and risky to demand higher wages.”

I know you’re primarily focused on technology here, but three factors come to mind that make this case unique to the US.

1. Weak US unions. In most European countries labor’s bargaining power
is far greater and it’s harder to replace workers with machines

2. More aggressive pursuit of technology in the US. Apparently, US tech
managers, CIOs and CTOs stay with companies shorter than their European
counterparts and pursue more aggressive tech strategies while they’re
there. Europeans are less aggressive, the theory goes, because their
labor market is smaller and their job options fewer … so they’ll have to
live with the consequences fo their strategies and make them work in
practice. Which makes them wary of big pushes, it seems. (Can’t find a
link to the source article, sorry)


3. The sheer size of the US market. Automating makes sense only at a
scale that overcomes its expense. If your national market is small – for
example five or ten million people – then a lot of automation
investments can’t break even over a reasonable horizon. A market sized
like the US opens the door for bigger-is-better strategies that go
hand-in-hand with large-scale automation.

In Norway, where I live, we are of course also optimizing and
automating, but unions are strong, the local market is small and the
tech manager labor pool is perhaps a few thousand jobs and people.

We could be the exception to the rule but here’s our statistics:

– the average monthly wage for all salaried employees was NOK 36,700 (about USD 6,500) in 2010

–  employee wages grew by 3.2% in 2008–2009 and by 4% in 2009–2010

– unemployment is at 2.7%


So, technology plays a large part and is enabled by factors like those
above. Other countries are of course automating but they’re smaller,
have different labor markets etc and thus produce a different total
result. Your hypothesis is quite interesting, but I don’t think it can
be generalized across borders.


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