Where the Money Went: Corporate Profits vs Worker Pay

The previous episodes in this series established the central puzzle of American economic life: productivity has grown far faster than compensation. Output per hour has doubled and tripled. Real hourly pay has inched forward. The gap between those two lines — the productivity-pay divergence that has widened steadily since the early 1970s — represents trillions of dollars of economic output that went somewhere.

This episode answers the question of where.

The BLS publishes a set of quarterly indices for the nonfinancial corporate sector — the largest measurable slice of the American economy, encompassing everything from manufacturing plants and retail chains to technology firms and construction companies, but excluding banks, insurers, and other financial intermediaries. Among these indices are two that, when placed side by side, tell one of the most consequential economic stories of the postwar era.

The first is NFC Corporate Profits (series PRS88003183) — the total profit generated per unit of real output. The second is NFC Labor Share (series PRS88003173) — the share of output that goes to workers as compensation. Both are indexed to 2017 = 100.

One of these lines goes up. The other goes down. The story they tell together is the story of who captured the gains from seventy-seven years of American economic growth.

In 1947, the NFC profits index stood at 1.8. That is not a typo. On a scale where 2017 equals 100, the starting point is barely visible — a rounding error, a sliver at the bottom of a chart. By 2024, that index had reached 219.1. The journey between those two numbers is a story of compounding returns to capital that has no parallel in the labor data.

The growth was not steady. It came in waves, each one larger than the last. Through the 1950s and 1960s, profits climbed gradually from the low single digits to the teens. The index reached 10.3 by 1958 and 24.7 by 1970 — impressive growth in absolute terms, but still a fraction of what was to come. The inflationary 1970s were turbulent for profits: the index bounced between 17.7 and 24.7, squeezed by rising costs and energy shocks that ate into margins faster than firms could raise prices.

Then came the turn. Beginning in the early 1980s, as the Volcker recession broke inflation’s back and the era of deregulation began, corporate profits entered a sustained upswing that would define the next four decades. The index crossed 30 in 1977, 50 in 1986, and 80 by 1997. Each of these thresholds took roughly a decade to breach. But the acceleration was building.

The post-2017 surge was something else entirely. From the 2017 baseline of 100, profits reached 127.5 by 2020 — a 27.5% gain in just three years. Then COVID-19 hit, and something unexpected happened: instead of collapsing, profits exploded. By 2021, the index had leaped to 168.8. By 2023, it had more than doubled the 2017 level at 214.2. By Q4 2024, it stood at 219.1 — the highest reading in the 77-year history of the series.

The chart below plots the NFC profits index alongside the NFC labor share index from 1947 to 2024, both using Q4 readings. The visual is striking for its simplicity: one line trends relentlessly upward; the other drifts relentlessly downward. They move in opposite directions because they are opposite sides of the same equation. Every dollar of output in the nonfinancial corporate sector goes to one of two places: labor compensation or capital income (profits, interest, rent, and depreciation). When profits rise as a share of output, labor’s share falls. The two are mechanically linked.

But the mechanical link does not make the divergence inevitable. For the first quarter-century of the postwar era, both series were relatively stable. Labor share fluctuated in a narrow band between 103 and 113, never straying far from its long-run level. Profits grew, but so did the overall pie — output expanded fast enough that both labor and capital could claim larger absolute amounts even as the shares remained roughly constant.

The break came in the mid-1990s. Labor share, which had averaged roughly 108–110 through most of the 1970s and 1980s, began a slow, grinding descent. By 2000, it had fallen to 106.4. By 2010, it was at 101.5. By 2017, it had fallen through the baseline to 100. And in 2024, it sits at 96.4 — meaning that workers receive 3.6% less of each dollar of output than they did in 2017, and roughly 12% less than they did in the early postwar decades.

Meanwhile, profits did exactly the opposite. Every percentage point that labor share lost, capital income gained. The divergence accelerated after 2000 and became extreme after 2020. In 2021, corporate profits nearly doubled their 2017 level while labor share fell further below the baseline. This is not a statistical artifact. It is the arithmetic of income distribution: when the pie grows and labor’s slice shrinks, someone else is eating more. That someone is capital.

The inverse relationship is visible in every decade, but it becomes most dramatic in the 2020s. Between 2019 and 2024, the profits index rose from 116.4 to 219.1 — an 88% increase in five years. Over the same period, labor share fell from 100.0 to 96.4. The gap between the two lines widened more in those five years than it had in the preceding twenty.

This is the arithmetic reality behind the “greedflation” debate that consumed economic discourse in 2022 and 2023. When firms raised prices faster than their costs increased, the difference accrued to profits, not wages. The BLS data does not take a position on whether this was justified or predatory — it simply records the outcome. And the outcome was the largest profit surge in the 77-year history of the nonfinancial corporate sector.

To understand the magnitude of what happened after 2017, it helps to focus on the seven-year period from the index baseline to the present. In economic history, seven years is a short time. It is roughly one business cycle. It is the gap between two presidential terms. Yet in those seven years, NFC corporate profits more than doubled.

The table below tracks the profit explosion year by year. The 2017 baseline of 102.0 (not exactly 100 because we use Q4 readings, and the annual average is the true baseline) serves as the starting point. By 2019, profits were up 14%. The pandemic year of 2020 saw a 25% gain — counterintuitive, given that millions of workers lost their jobs and GDP contracted. But the NFC sector includes the survivors: companies that cut costs, received government support, and benefited from the massive fiscal and monetary stimulus that flooded the economy.

Then came the explosion. Between 2020 and 2022, the profits index rose from 127.5 to 191.3 — a 50% increase in two years. This was driven by the combination of reopening demand, supply-chain pricing power, and the lag between rising prices and rising wages. Companies raised prices immediately; wage increases came later and smaller. The difference was profit.

Notice the symmetry in the table. In 2021, profits surged 65% above the 2017 baseline while labor share dropped 1.3% below it. By 2022, the gap was even wider: profits up 88%, labor share down 4.2%. The year 2020 is the only exception — the pandemic temporarily boosted labor share as companies retained workers through lockdowns (partly via Paycheck Protection Program loans) while profits initially compressed. But that reversal lasted exactly one year. By 2021, the pattern had reasserted itself with a vengeance.

The 2023 and 2024 readings suggest the surge has plateaued but at an extraordinarily high level. Profits grew only 5 points between 2023 and 2024, compared to 23 points between 2022 and 2023 and 23 points between 2021 and 2022. The era of explosive profit growth may be ending. But the new baseline is more than double the 2017 level — and labor share has not recovered.

Zooming out from the post-2017 surge, the 77-year history of NFC profits divides naturally into four distinct eras, each with its own character and its own relationship to labor share.

Era I: The Postwar Compact (1947–1973)

In the first era, profits and labor shared the gains of growth roughly proportionally. The profits index rose from 1.8 to 7.6 over 26 years — substantial growth, but matched by rising real wages. Labor share hovered between 103 and 113 throughout this period, fluctuating with the business cycle but showing no secular trend. This was the era of the “Treaty of Detroit” — the implicit social compact in which corporations shared productivity gains with workers through higher wages. Union membership peaked at 35% of the workforce. Cost-of-living adjustments were standard in labor contracts. And the BLS data shows the result: a stable division of the economic pie.

Era II: Stagflation and Squeeze (1973–1986)

The oil shocks of 1973 and 1979 disrupted the compact. Profits oscillated wildly — the index ranged from 6.6 in 1972 to 15.0 in 1979, then crashed to 13.0 in 1983 before surging to 21.5 by 1986. Labor share remained elevated, averaging roughly 108–111, as unions fought to maintain wages against inflation. This was the era when the profit-labor relationship was most contested: both sides struggled over a pie that was growing slowly and being eroded by inflation. The Volcker recession broke this stalemate — not by increasing the pie, but by breaking labor’s bargaining power.

Era III: The Capital Ascendancy (1986–2017)

From the mid-1980s onward, profits entered a sustained structural upswing. The index rose from 21.5 in 1986 to 102.0 in 2017 — nearly quintupling in three decades. This was the era of globalization, deregulation, the decline of unions (membership fell from 20% to 11%), the rise of shareholder capitalism, and the technology revolution. All of these forces tilted the playing field toward capital. Labor share began its long decline, falling from around 110 in the late 1980s to 100 by 2017. The shift was gradual — roughly 0.3 points per year — but relentless and cumulative.

Era IV: The Profit Supernova (2017–present)

The current era has compressed decades of change into years. The Tax Cuts and Jobs Act of 2017 immediately boosted after-tax profits. Then the pandemic created a once-in-a-century combination of supply shortages, demand stimulus, and pricing power. Profits didn’t just grow — they erupted. The index more than doubled in seven years. Labor share fell further below the baseline. The social compact that held (roughly) for the first 25 years of the postwar era has been decisively broken for the last seven.

The decade averages tell a story of accelerating divergence. Profits grew roughly 60–90% per decade through the entire postwar era — healthy but unremarkable growth when the economy was expanding at similar rates. But in the 2020s, with only five years of data, the average has already surged 107% above the 2010s average. Meanwhile, labor share has fallen from a decade average of 98.8 in the 2010s to 97.8 in the 2020s. The direction has not changed. The speed has.

The NFC profits index measures total profits relative to output. But the BLS also publishes a related measure that makes the story even more concrete: unit profits — the profit earned per unit of real output produced in the nonfinancial corporate sector. If you think of the NFC sector as a single enormous factory producing a standardized widget, unit profits tell you how much profit the factory earns on each widget, adjusted for inflation and indexed to 2017 = 100.

In 1947, unit profits stood at 25.0. The factory was earning a quarter of what it would earn per widget in 2017. Over the following decades, unit profits rose unevenly — reaching 52.1 by 1970, then bouncing between 36 and 66 through the inflationary 1970s and early 1980s as input costs and selling prices played tug-of-war.

The post-2000 trajectory is what stands out. Unit profits crossed the 2017 baseline of roughly 100 around 2014, then held steady for several years. But beginning in 2020, unit profits began an ascent that dwarfs anything in the historical record. The index surged from 100.9 in 2019 to 174.3 in 2024 — a 73% increase in five years. To return to the factory metaphor: for every widget produced in the NFC sector in 2024, corporations earned 73% more profit than they did per widget in 2019. The widgets didn’t get 73% better. The factories didn’t get 73% more efficient. The profit per unit simply expanded because prices rose faster than per-unit labor costs.

The unit profits chart reveals several features that the total profits chart obscures. First, the 1970s were genuinely bad for profitability. Unit profits peaked at 52.1 in 1970, then spent the next 15 years oscillating below that level before finally breaking through permanently in the mid-1980s. The inflationary era was not kind to corporate margins — costs rose as fast as prices, leaving per-unit profits squeezed. This experience shaped an entire generation of corporate management, who learned that pricing power without cost control is an illusion.

Second, the Great Recession crushed unit profits more than any event since the 1970s. The index fell from 94.9 in 2008 to 75.0 in 2010 — a 21% decline in two years. Companies that had expanded margins during the 2004–2008 boom suddenly found themselves with too much capacity and not enough demand. The recovery was slow: it took until 2013 for unit profits to return to pre-crisis levels.

Third, and most important, the post-2020 surge has no historical precedent in either magnitude or speed. The jump from 105.5 in 2019 to 174.3 in 2024 is the largest five-year increase in the 77-year history of the series. The second-largest was the recovery from 75.0 in 2010 to 116.4 in 2017 — a 55% increase over seven years. The current surge achieved a larger percentage gain in five years. Something structurally changed in the relationship between pricing and costs, and it happened almost overnight.

The relationship between profits and labor share is not merely coincidental — it is mechanically inverse. Understanding why requires a brief excursion into national income accounting.

In the NFC sector, total output (value added) is divided among several claimants: worker compensation (wages plus benefits), corporate profits, net interest, depreciation, and taxes on production. Labor share measures compensation as a fraction of output. When profits rise faster than output, they necessarily crowd out other claimants — and since interest rates, depreciation schedules, and tax rates change slowly, the primary claimant that gets squeezed is labor.

This arithmetic relationship means that the two lines on Chart 1 are not independent observations. They are mirror images of the same underlying distribution. When the profits line surges, as it did in 2021–2023, the labor share line must fall by a corresponding amount (adjusted for the other, smaller claimants). The BLS data confirms this with remarkable precision:

The only exception to the inverse pattern in recent history is 2020 — the pandemic year when government transfer programs temporarily boosted labor share even as profits also rose. In every other year, the relationship holds: when profits surge, labor share falls. When profits moderate (as in 2023–2024), labor share stabilizes or recovers slightly.

Over longer horizons, the relationship is even clearer. The decade from 1997 to 2007 saw profits rise 37 index points while labor share fell 10 points. The seven years from 2017 to 2024 saw profits rise 117 points while labor share fell 3.6 points. The absolute magnitudes differ, but the direction is consistent: capital gains come at labor’s expense, and vice versa.

An index number — 219.1 or 96.4 — is abstract. What does a 12,000% increase in the profits index actually mean for the American economy?

The NFC sector produces roughly $13 trillion in value added annually (as of 2024), representing about half of U.S. GDP. Corporate profits in this sector totaled approximately $2.3 trillion in 2024, up from roughly $1.2 trillion in 2017 and $600 billion in 2007. The doubling from 2017 to 2024 represents roughly $1.1 trillion per year in additional profit flowing to capital owners — shareholders, private equity firms, family-owned businesses — that would have, under the earlier income distribution, gone to workers as wages and benefits.

To put $1.1 trillion in perspective: it is roughly equal to the entire annual federal discretionary budget. It is more than the combined revenues of the five largest companies in the S&P 500. It is approximately $7,000 per American worker per year — money that, in a world where the 2017 income distribution had held, would have appeared in paychecks rather than profit statements.

This is not an argument that profits are illegitimate or that the shift is entirely extractive. Some portion of the profit surge reflects genuine efficiency gains, technological innovation, and the rewards of risk-taking. The question is not whether profits should exist — they should — but whether the speed and magnitude of the shift is consistent with an economy that is working for all of its participants, or one in which the gains from growth are being captured by an increasingly narrow slice.

The 2021–2023 profit explosion occurred during the worst inflationary episode in four decades. Consumer prices rose 9.1% year-over-year at the June 2022 peak. Grocery prices increased 13%. Energy costs doubled. And throughout this period, corporate profits in the NFC sector were not merely holding steady — they were surging to all-time highs.

This coincidence sparked a fierce debate among economists. On one side were those who argued that corporations were using inflation as cover to raise prices above and beyond their cost increases — “greedflation.” On the other side were those who argued that profits were simply reflecting the normal dynamics of supply and demand: shortages meant pricing power, and pricing power meant profits.

The BLS data does not resolve this debate, but it does quantify it. Between 2019 and 2022, the unit profits index rose from 105.5 to 163.4 — a 55% increase. Unit labor costs (the flip side of the equation) rose from 99.7 to 104.2 over the same period. In other words, the profit earned on each unit of output rose five times faster than the labor cost per unit. Whether this was “greed” or “market dynamics” is a normative judgment. That it happened is an empirical fact.

The resolution may lie somewhere in between. Companies with genuine pricing power — those selling essential goods, those with brand loyalty, those operating in concentrated markets — were able to pass through cost increases and then some. Companies without pricing power saw margins squeezed. The aggregate data shows the winners dominated: the NFC sector as a whole massively expanded its profit margin during the inflationary episode. The losers were consumers, who absorbed the higher prices, and workers, whose wage increases lagged price increases by 12–18 months.

The BLS data quantifies the what but does not explain the why. Several structural forces have contributed to the shift from labor to capital income over the past half century:

Declining unionization. In 1953, roughly 35% of American workers belonged to a union. By 2024, that number had fallen to approximately 10%. Unions are the primary institutional mechanism through which workers claim a share of productivity gains. As union density declined, so did labor’s bargaining power — and so did labor’s share of output.

Globalization and labor arbitrage. Beginning in the 1990s, the integration of China, India, and Eastern Europe into the global trading system effectively doubled the world’s available labor supply. American workers found themselves competing with billions of workers willing to accept far lower wages. This competition suppressed domestic wage growth even as productivity continued to rise, with the difference accruing to profits.

The rise of intangible capital. The shift from manufacturing to services and technology changed the nature of corporate investment. Physical capital — factories, equipment, vehicles — requires workers to operate it. Intangible capital — software, patents, brand value, algorithms — generates returns with far less labor input. As intangible investment surpassed tangible investment (around 2000), the economy became structurally less labor-intensive, enabling profits to grow without proportional increases in compensation.

Market concentration. The American economy has become more concentrated over the past three decades. In industry after industry — airlines, telecom, banking, technology, retail — a handful of dominant firms control the majority of market share. Concentrated markets generate above-normal profits because dominant firms can maintain pricing power that competitive markets would erode. These excess profits accrue to capital, not labor.

Tax policy. The effective corporate tax rate has fallen from roughly 50% in the 1950s to around 15% in the 2020s, with the 2017 Tax Cuts and Jobs Act delivering a particularly sharp reduction. Lower taxes directly increase after-tax profits. But they also change corporate behavior: with more after-tax cash, companies have increased share buybacks and dividends (returns to capital) rather than wages (returns to labor).

This episode exists within a series about the productivity paradox — the puzzle of why American workers produce far more per hour than they did fifty years ago but are paid only marginally more. The profits and labor share data provide the missing piece of that puzzle.

When productivity grows faster than compensation, the surplus accrues to one of three destinations: higher corporate profits, higher depreciation charges (reflecting more capital-intensive production), or higher taxes. Since taxes have fallen and depreciation has grown only modestly, the overwhelming majority of the surplus has flowed to corporate profits.

This is not speculative. It is arithmetic. If output per hour doubles and compensation per hour rises only 50%, the remaining 50% shows up in the income accounts as non-labor income — primarily profits. The NFC profits index, rising from 1.8 to 219.1 over 77 years, is the cumulative record of that surplus. The labor share index, falling from 109.2 to 96.4, is the record of labor’s declining claim on the output it produces.

Together, these two indices answer the question that has defined the productivity paradox: Where did the money go? It went to capital. It went to profits. It went to shareholders, corporate treasuries, and the asset prices that capital income supports. The productivity gap did not vanish into thin air. It did not result from measurement error or statistical illusion. It became the largest sustained increase in corporate profitability in the 77-year history of the BLS data.

As of Q4 2024, the NFC profits index has plateaued near its all-time high. The 219.1 reading is only modestly above the 214.2 of 2023, suggesting that the explosive phase of the post-pandemic profit surge has ended. Unit profits actually declined slightly, from 178.2 to 174.3, as per-unit costs began to catch up with per-unit prices. This is the normal endgame of a profit cycle: eventually, wages adjust upward, competition erodes pricing power, and margins compress.

But “compression” in this context means a decline from extraordinary levels to merely elevated ones. Even at 174.3, unit profits are 73% above their 2017 baseline and 65% above their 2019 level. The question for the next several years is whether the profit surge represents a permanent structural shift — a new baseline from which the economy will operate going forward — or a temporary distortion that will gradually normalize.

If it is permanent, the implications are profound. A permanently higher profit share means a permanently lower labor share, which means a permanently wider gap between productivity and pay. It means that the social compact that characterized the first 25 years of postwar growth — in which productivity gains were shared between capital and labor — has been replaced by a new equilibrium in which capital captures the lion’s share.

If it is temporary, then the next several years should see unit profits declining back toward 100–120 and labor share recovering toward 100 or above. This would likely require some combination of wage growth (which is occurring, slowly), margin compression (which has begun), and competitive dynamics (which take time to play out).

The BLS will continue to publish these indices every quarter. The numbers will tell us which path the economy is taking. For now, the 2024 readings suggest a plateau, not a reversal. Profits remain near their all-time highs. Labor share remains below the baseline. The money continues to go where it has gone for the past fifty years: to capital.