Candice Horbacz
Economists and journalists have been pointing to a labor share of income series from the Bureau of Labor Statistics (BLS) as evidence that capital is taking an ever-increasing slice of the economic pie. By that series, labor’s share fell from nearly two-thirds in the 1950s to about half today, fueling headlines like "US workers’ share of national income falls to a new low." However, a closer examination of the national income accounts, particularly the distinctions between gross and net income and the underlying assumptions used to categorize income, reveals a more nuanced and, in fact, more stable picture of labor’s economic standing than widely reported. This discrepancy holds significant implications for public understanding, economic policy, and the ongoing debate surrounding income inequality.
The Pervasive Narrative: A Declining Labor Share
The concept of labor share—the proportion of national income that accrues to workers in the form of wages, salaries, and benefits—is a fundamental metric for understanding income distribution within an economy. For decades, the prevailing narrative, largely informed by specific BLS data series, has suggested a significant and concerning decline. This narrative posits that while the overall economic pie has grown, the slice allocated to labor has consistently shrunk, with the remainder increasingly flowing to capital owners. This trend, if accurately portrayed, would signal a structural shift in economic power, potentially exacerbating wealth inequality and necessitating significant policy interventions.
The BLS series, often cited, indicates that labor’s share of income has plummeted from nearly 66% in the mid-20th century to approximately 50% in recent times. Such figures have naturally generated alarm, prompting discussions about the role of globalization, technological automation (including the rise of AI tools), declining unionization, and shifting corporate power dynamics in eroding workers’ economic gains. Headlines proclaiming a "new low" or a "50-50 split" between labor and capital have become commonplace, shaping public perception and influencing policy debates on minimum wages, taxation, and social safety nets.
Unpacking Gross Domestic Income: A Closer Look at the $32.2 Trillion Economy
To truly understand the distribution of income, it’s crucial to disaggregate Gross Domestic Income (GDI), which totaled approximately $32.2 trillion at an annual rate in the second quarter of 2026. This aggregate represents the total income earned from producing goods and services in the U.S. economy.
The initial breakdown provides what appears to be a clear split: 50.4 cents of every dollar were paid directly to workers as compensation, comprising 41.5 cents in wages and salaries and 8.9 cents in benefits. This portion is unambiguously labor income. The remaining 49.6 cents, often broadly labeled "nonlabor income" by commentators, is where the interpretative challenge begins. Simply attributing this entire residual to "capital" or "owner" income, as is frequently done, overlooks critical distinctions within the national accounts that significantly alter the true picture of capital’s slice.
Deconstructing "Nonlabor" Income: What Really Accrues to Capital?
A detailed analysis of the components typically lumped into "nonlabor income" reveals why the blanket attribution to capital is misleading. The income unambiguously paid to capital includes corporate profits after corporate tax, interest, and rents. In the second quarter of 2026, these categories amounted to nearly 17 cents of every dollar of gross income.
Within this capital income, it’s important to note the inclusion of about 3.6 cents for "imputed rent." This is an estimate of what homeowners would hypothetically pay to rent their own homes, a statistical construct designed to capture the value of housing services in GDP. While essential for national accounting consistency, imputed rent is not actual cash income that individuals collect, nor is it typically what people envision when discussing "capital income." Excluding this statistical artifact would further reduce the perceived capital share. (The national accounts also include the "current surplus of government enterprises," which typically operate at a loss and represent a small, negative value, thus being excluded from this analysis for clarity.)
Beyond these unambiguous categories, another 6.7 cents of every dollar represented the income of proprietorships and partnerships. This category is inherently ambiguous, representing a mix of compensation for the owners’ direct labor and return on their invested capital. If, for the sake of arriving at the highest possible estimate for capital, one were to attribute this entire 6.7 cents to capital, the total capital share would still only reach 24 cents per dollar of gross income – a figure significantly less than the commonly cited "half." This highlights a fundamental definitional challenge that colors much of the public discourse.
Gross Income Overstated: The Role of Depreciation and Taxes
A significant portion of what is included in gross income, and consequently in the BLS’s "nonlabor" category, does not actually accrue to any individual or entity as disposable income. These categories are crucial for understanding the true distribution of economic value.
- Depreciation: Nearly 17 cents of every dollar of gross income is accounted for by depreciation. This represents the cost of replacing worn-out buildings, equipment, and software. It is an economic expense necessary to maintain the existing capital stock. This spending returns the capital stock to its original state each year and, critically, does not translate into a paycheck for a worker or a deposit into a brokerage account for a capital owner. It is a cost of doing business, not a return to capital.
- Taxes: Another substantial portion is collected as taxes before income ever reaches a household or business as net profit. This includes 7.0 cents in taxes on production and imports (TOPI), encompassing sales and property taxes, federal excise taxes, and customs duties (net of subsidies). Additionally, 2.8 cents are collected as corporate income taxes. These are revenues for the government, not income that accrues to capital owners.
Using a gross measure of income to attribute non-labor income to capital means counting these essential expenses and government revenues as if they were returns to capital. This creates particularly counterintuitive scenarios, such as tariffs. Every dollar of tariff revenue mechanically increases the "nonlabor" share of income and is thus categorized as "capital income" under this broad interpretation. However, standard economic analysis of tariff incidence, which examines who ultimately bears the cost of tariffs, does not typically consider tariff revenue to be capital income for private actors. This conceptual misalignment underscores the need for a more precise accounting framework.
The Net Income Perspective: A More Accurate Gauge
Removing depreciation and taxes from the gross income calculation yields net income. In the second quarter of 2026, this adjusted figure represented roughly $23.7 trillion of private sector income that was actually paid out to people. Focusing on net income provides a clearer picture of the income available for consumption or saving by households and businesses, and thus a more accurate basis for assessing income distribution.
A leading body of economic literature on labor share, as highlighted in a recent survey by the American Economic Association, distinguishes between three categories when analyzing net income:
- Unambiguous labor income: Employee compensation (wages, salaries, and benefits).
- Unambiguous capital income: Corporate profits, interest, and rents.
- Ambiguous remainder: Proprietors’ income (after excluding taxes).
Tracking these three categories as shares of net income since 1947 presents a substantially different and more stable narrative than the headlines driven by the gross BLS series.
Historical Trends in Net Income: A "Round Trip" for Labor
Contrary to the persistent downward trend depicted by the BLS series, the share of unambiguous labor income, when measured against net income, has shown a distinct "round trip" trajectory over the postwar era:
- In the late 1940s, unambiguous labor income constituted approximately 69 percent of net income.
- It then rose significantly, reaching about 75 percent in the 1970s. This period coincided with a robust manufacturing sector, strong labor union presence, and a more regulated economic environment.
- Today, it stands at 68.3 percent. This figure, while slightly lower than its peak in the 1970s, is remarkably close to its level in the late 1940s. This suggests that labor’s share is not at an "unprecedented" or "never-before-seen" low, but rather within historically observed levels.
Conversely, unambiguous capital income has seen a rise, moving from about 13 percent of net income in the late 1940s to 22.6 percent today. More than half of this increase has occurred since 2000, when it was around 17 percent. The largest single jump in capital’s unambiguous share, notably, was observed during the pandemic years of 2020 and 2021, a period characterized by unprecedented monetary and fiscal stimulus, supply chain disruptions, and shifting consumer demand patterns, preceding the widespread integration of advanced AI tools.
The ambiguous proprietors’ slice, representing the income of self-employed individuals and partnerships, has also evolved. It fell from about 18 percent of net income in the 1940s to roughly 10 percent by 1970, largely driven by the long-term decline in the agricultural sector’s share of the economy. It reached a low of about 6.7 percent in 1982, then recovered to oscillate between 9 percent and 10 percent, currently measuring 9.1 percent.
The allocation of proprietors’ income is critical. If entirely assigned to labor, capital’s share remains at 22.6 percent of net income. If, to derive the highest possible capital share, it is all assigned to capital, the share rises to 31.7 percent of net income. Even this upper bound is still far below the "half" often cited in headlines. Recent research, notably from the National Bureau of Economic Research (NBER), suggests that proprietor income is predominantly labor income, meaning even the 31.7 percent estimate for capital’s share is likely too high. Given that proprietor income has been a relatively stable share since the late 1980s, its dynamics are unlikely to be the primary driver of recent trends or the divergence from the BLS figures, unless its labor/capital split itself has changed over time.
The BLS Approach: Methodological Nuances and Assumptions
The divergence between the national accounts perspective and the BLS series largely stems from differing methodologies and underlying assumptions. A labor share estimate necessitates a clear division of income into labor and capital categories. While this split is relatively straightforward in the corporate sector (wages on one line, profits on another), it becomes complex for noncorporate businesses, whose income is a blend of labor and capital. Many economists, for this reason, restrict their analysis to the corporate sector. The BLS measure, however, aims for a broader scope but employs an imputation strategy that introduces significant variability and potential for misinterpretation.
The BLS measure typically covers only the nonfarm business sector, accounting for about three-quarters of the economy. This immediately contrasts with a comprehensive national accounts approach that seeks to encompass all income under a consistent convention. Key aspects of the BLS methodology include:
- Imputation of Proprietor Income: The BLS assumes that proprietors "pay themselves" an amount equivalent to the average hourly compensation of employees in their sector, multiplied by their hours worked. Any remaining income for the proprietorship is then treated as capital income. This time-varying allocation has profoundly shifted the inferred capital share of proprietors’ income, which some estimates suggest rose from less than a fifth in 1990 to about half today. This approach, while systematic, can be sensitive to fluctuations in average employee compensation and hours, potentially amplifying perceived shifts in the labor-capital split that do not reflect actual changes in economic ownership.
- Omissions: The BLS measure explicitly excludes significant sectors:
- Government and Nonprofits: These sectors, representing roughly 15 percent of the economy, are largely labor-intensive. Including them, as BLS economists themselves acknowledge, would demonstrably increase the estimated labor share. Their exclusion thus systematically biases the BLS figure downwards.
- Farms: While less significant today, the exclusion of farms makes historical comparisons problematic. Farm proprietors’ income was a substantial 6 percent of total income in the late 1940s. Its omission removes a historically important source of mixed labor and capital income, distorting long-term trends.
- Statistical Discrepancy: The BLS ratio divides income-side compensation by product-side output. The "statistical discrepancy"—the bookkeeping gap between Gross Domestic Product (GDP, measuring output) and Gross Domestic Income (GDI, measuring income)—can affect the trend. The national accounts approach, by contrast, uses income accounts consistently, ensuring all components sum to total income by construction, thus avoiding this potential source of error.
Correcting the Narrative: Implications for Policy and Public Understanding
The persistent description of the labor share as "unprecedented" or at a "record low," the notion of a "50-50 split," and the commonly shared graphic depicting a consistent downward trend since the 1940s are, based on a deeper look at national income accounts, misleading.
The corrected understanding suggests:
- While labor earns approximately half of every dollar of gross income, the remainder should not be simplistically attributed entirely to capital. Much of what is counted in gross income—depreciation and taxes—does not accrue to anyone as disposable income.
- A more accurate measure, utilizing net income, shows that the share of income accruing to capital is between 22.6 percent and 31.7 percent, depending on the treatment of proprietors’ income. This is significantly less than "half."
- Labor’s share, when properly measured using net income and unambiguous categories, is back to a historically precedented level, not an "unprecedented" low. The economic journey of labor’s share has been a "round trip," rising from the late 1940s, peaking in the 1970s, and then returning to similar levels today, rather than a consistent decline.
These distinctions are not merely academic; they hold profound implications for economic policy and public discourse. Misinterpreting the labor share can lead to misguided policy prescriptions aimed at addressing an incorrectly diagnosed problem. If policymakers believe capital is consuming half of all income, they might advocate for more aggressive capital taxation or redistribution policies than if capital’s actual share is closer to a quarter or a third. Understanding these nuances is crucial for fostering informed discussions about economic inequality, productivity, and the future of work. It calls for greater clarity from statistical agencies and a more critical approach to economic reporting, ensuring that the public and policymakers are equipped with the most accurate and contextually rich data available to navigate complex economic realities.
