Corporate Profits Up. Productivity Up. Worker Compensation Down. What Gives?
Something unusual is happening between American businesses and American workers. Corporate profits are rising, business investment is climbing, productivity is improving, capital-goods orders have strengthened, and the stock market remains near record highs.
Yet labor’s share of economic output has fallen, hiring remains subdued, workers are reluctant to quit, and consumer confidence remains weak.
That raises a question:
Why isn’t stronger business investment producing a comparably strong increase in labor demand?
One possibility is straightforward: investment comes first and hiring follows later. But another possibility is beginning to look increasingly interesting: What if companies are investing for a future workforce they do not fully understand yet—and what if artificial intelligence is beginning to influence hiring decisions before its full productivity benefits have arrived?
Profits and Productivity Are Rising
The corporate side of the economy looks surprisingly strong. The latest BEA report showed corporate profits from current production rising by $400.9 billion in the second quarter, after increasing just $74.4 billion in the first. Business investment also contributed to economic growth.
Our own two-year indicators show the same broader pattern: corporate profits have rebounded sharply, business fixed investment has continued climbing, capital-goods orders have strengthened, and labor productivity is moving higher.
In the second quarter, nonfarm business productivity increased at a 1.4% annualized rate as output increased 1.7% while hours worked increased only 0.3%. Compared with a year earlier, productivity was up 2.2%.
Zoom out further and the pattern becomes even more striking: since the end of 2019, nonfarm business output has grown at a 2.5% annualized rate while hours worked have increased only 0.4%. Productivity has accounted for most of the difference.
Businesses are producing more without increasing labor input nearly as quickly. Productivity growth is one of the foundations of rising living standards, but the key question is what happens to the gains.
Workers Are Not Capturing the Same Share
BLS reported that real hourly compensation declined 0.1% over the past four quarters. At the same time, labor’s share of nonfarm business output fell to 52.9% in the second quarter—the lowest level in a series extending back to 1947.
That does not mean workers are universally becoming poorer or that corporate profits are illegitimate. It tells us something narrower:
The share of business output flowing to labor through compensation has fallen while productivity and corporate profitability have strengthened.
Profits are moving higher, productivity is moving higher, and labor share is moving lower. This naturally raises another question: Where are the gains from increased productivity going?
Workers Have Jobs—but Fewer Reasons to Move
The labor market is not experiencing mass unemployment. June JOLTS data showed 7.4 million job openings, 5.3 million hires, 3.2 million quits, and 1.8 million layoffs and discharges. Layoffs remain relatively contained, but hiring and quits are subdued.
BLS notes that quits measure workers’ willingness or ability to leave their jobs; the quits rate was only 2.0% in June. That suggests an important distinction:
Employment security remains relatively high, but employment opportunity has deteriorated.
Someone can feel reasonably secure in their current job while worrying about what happens if they lose it—whether they can find another job, move to a better employer, negotiate higher pay, or change careers. Consumers appear to be worried about exactly this.
Consumers Are More Worried About Tomorrow Than Today
The Conference Board’s August survey produced an unusually revealing split: its Present Situation Index increased 6.8 points to 121.2, but its Expectations Index fell 5.8 points to 68.2.
Consumers became more pessimistic about future business conditions, employment, and household income. Only 14.6% expected more jobs to become available over the next six months, while 26.1% expected fewer.
Instead of saying: “Everything is terrible right now.”
Consumers are saying: “I am uncertain about what comes next.”
That diagnosis brings us directly to AI.
The AI Investment Boom Has a Strange Problem
Companies are investing enormous amounts of money in artificial intelligence, but there is still tremendous uncertainty about the eventual return.
A recent Wall Street Journal report from Camp Kotok captured the paradox well: participants openly questioned whether the trillions committed to AI would produce sufficient returns, yet investors remain reluctant to step away because missing a technological revolution appears equally frightening. The investment boom itself has become increasingly important to U.S. economic growth even as returns remain debated.
This creates a complex decision problem for corporate leadership:
- Which workflows will actually automate?
- Which AI projects will generate acceptable returns?
- Which existing jobs will change or disappear?
- Which entirely new jobs will emerge, and what skills will become valuable?
If management does not know these answers yet, hiring aggressively into the old organizational model starts to look risky.
What If Companies Are Preserving Their Options?
Consider a potential CEO strategy under technological uncertainty:
AI arrives → Hiring slows → Roles aren't automatically backfilled → Organizations reorganize → Productivity becomes clearer → Different skills are hired later
We are beginning to see real-world examples consistent with this pattern:
- Tata Consultancy Services: Stated that increasing use of AI agents is expected to reduce hiring even as tasks migrate to AI and new roles emerge.
- Chime: Cited that AI required new skills and allowed smaller, flatter teams to accomplish more when announcing workforce reductions.
- Meta: Pursued an aggressive attempt to reorganize around smaller AI-enabled teams; technical hurdles and employee resistance forced a partial retreat even while continuing massive AI investment.
Companies believe the destination is coming; they simply do not know exactly how to get there yet.
AI Doesn't Have to Replace Workers Today to Affect Hiring Today
We normally imagine technological change occurring in a traditional linear sequence:
New technology → Productivity improves → Companies need fewer workers → Hiring changes
However, expectations can alter the sequence:
Expected AI productivity → Uncertainty about future staffing needs → More cautious hiring today → Organizational experimentation → Actual productivity gains later
If this sequence holds, AI could influence the labor market before its full economic benefits appear in productivity statistics. The critical hiring decision is often not “Whom should we fire?” but simply: “Do we need to hire the next person?”
But There Are Other Explanations
To challenge the hypothesis, consider alternative explanations:
- Investment Lags: Investment often leads employment—businesses order equipment and build capacity first, hiring workers later to operate the expanded capacity.
- Demographics: Slower labor-force growth means fewer new jobs are needed each month to keep unemployment stable.
- Net Skill Transitions: Major staffing companies like Adecco expect AI to change tasks substantially and increase retraining needs without causing an economy-wide "job apocalypse".
The evidence does not currently prove AI is causing weak national hiring, but it gives us a clear reason to keep investigating.
A Window for Workers
If businesses reorganize around AI, the value of different skills will change. The transition may reward workers who can combine domain expertise, judgment, communication, technical literacy, data, AI tools, and workflow redesign.
Andrew Ng recently launched an initiative aimed at helping white-collar workers adapt, arguing that workers need to shift their skill mix as portions of existing work become automated. The risk for many workers may not be immediate job loss, but discovering later that the labor market has reorganized around a different skill set.
Three Stories Could Still Be True
The data currently support three plausible paths:
- The Normal Investment-Lag Story: Businesses invest first and hiring will follow later.
- The Productivity Story: Companies are learning to generate more output without increasing labor proportionally.
- The Workforce-Optionality Story: Companies expect AI to transform future staffing needs, but don't know which skills are needed yet—so they invest aggressively while remaining cautious on conventional hiring.
What Should We Watch Next?
The central question is what happens between the investment and the payoff. Do companies expand existing workforces, stop replacing departing workers, or reorganize around smaller teams?
What if AI is affecting the labor market before it is affecting productivity?
If that is happening, the first evidence of the AI labor transition may not be mass unemployment, but quieter shifts: less hiring, fewer job switches, more investment, changing skill requirements, and companies waiting to see how many people the new economy will need.