[cbsmith]

I think I understand the nature of your thinking.

You're presuming a fixed demand for labour, regardless of how much value it provides. Imagine if, for a moment, productivity increased to the point where one person could do all current work for all current employers, but of course there were many, many other people who could provide the same productivity. Do you expect that employers would not figure out a way to use some of that additional productivity to make more money?

The demand for a product increases as value it provides increases. The net effect is that employers' profits increase, but so do labours'. The divide on the split is determined by relative strength of their positions, but if it ever goes to zero for either side, it really kills the incentive for increased productivity in the first place (if employers see no benefit from increased worker productivity, there certainly won't be any more demand, and there will be no effort to exploit this new productivity... if employees see no benefit from the increased productivity, they'll have no incentive to be more productive).