There is still a lot
of confusion around about why UK real wage growth has been so low
since the Global Financial Crisis and 2010 austerity. Many want to
point to what economists call the functional distribution of income,
which is the split between wages and profits. This was one of the issues I talked about this in
a recent
post, but perhaps a more direct approach is required.
The first point to
note is that none of the decline in real wages over the last decade
or so is about a shift from wages to profits. Here is the labour
share of income from the 1970s until 2021.
The labour
share has fallen since the 1970s, but all of that fall occurred
before the recent period. Furthermore, the share of corporate income
in GDP has
remained fairly flat during this century. There has
been no sustained shift from wages to profits over the last ten to
fifteen years according to the data. There are a lot of problems with
UK corporations, but decreasing labour’s share of national income
isn’t one of them.
As my earlier
post makes clear, the main reason why real average
labour compensation has grown so slowly over the last ten or fifteen
years is that output growth and productivity growth have been so low.
It’s not about the distribution of the cake, but the size of the
overall cake. It is no coincidence that ever since Conservatives
started talking about a ‘strong economy’, the UK economy has been
anything but strong. (It is no coincidence because Conservative
politicians calling things a success to distract from failure started with Cameron/Osborne and the economy.)
What about this
year? In the first quarter of 2022 the
picture is very similar to the above. Of course real
wages in April were lower than in January, but that is because
inflation has been pushed up by higher commodity prices. The only
company profits to benefit from that are those of commodity
producers, and in particular oil and gas producers. That is why high
windfall profits taxes on those companies make
perfect sense.
I think some of the
confusion on this issue comes from the US, where the story is
different. While real labour compensation in the US tracked
productivity growth pretty closely in the 1980s and 1990s, this
stopped happening at the beginning of this century, with labour
compensation growing less rapidly than productivity. This in turn has
produced a substantial fall in the US labour share, and a rise in the
share of profits. But this has not been happening in the UK, and the
picture overseas varies greatly from country to country. Note also
that a falling labour share does not automatically imply a higher
profit share, but may instead reflect increases in indirect taxation,
lower subsidies or higher other income.
Another source of
confusion is generated by comparison of productivity and real median
wages. I first talked about the decoupling between these two measures
in this
post back in 2014, based on a study by Pessoa and Van
Reenen. That study has recently been updated and extended by
Teichgräber and Van Reenen (HT @centrist_phone),
which gives me a good excuse to talk about its conclusions once
again.
In terms of real
median wages and productivity there has been uncoupling in the UK. As
there is no decoupling between productivity and average real labour
compensation, then why are things different for real median wages? As
with the earlier study, Teichgräber and Van Reenen find two major
causes. The first and most important is the difference between mean
(average) and median due to growing inequality at the top, and the
second reflects growth in employers’ non-wage compensation
(basically pensions).
Here I want to focus
on the inequality cause, which is in large part down to the
increasing income share of the 1%. Earnings at the very top have
risen more rapidly than the rest (see below), which gets into the
mean or average compensation measure but is not part of the median
measure. A lot, but by far from all (see also below), of these high
and rapidly growing earnings are in the financial
sector. If you think that was a thing of the past (pre the Global
Financial Crisis), think again, with earnings in the financial sector
growing over the last year more
rapidly than most. This in turn should make us
sceptical about seeing the Global Financial Crisis rather than 2010
austerity being the key turning in the UK economy’s fortunes, but
that issue is for another time.
The key point I
wanted to make in my post 8 years ago was that the growing inequality
of the 1% has a big impact on everyone else. Concern about inequality
at the top need not be, as much of the media likes to suggest, about
envy, but instead can be about there being less income for everyone
else. The growing income share of the 1% has not paid for itself in
terms of more rapid growth, so their extra income comes from the 99%
i.e. other workers.
There is a lot more
of interest in the Teichgräber and Van Reenen paper, particularly
about the self-employed, but I want to stick to the theme of
inequality at the top by moving to a recent
IFS paper on top incomes. Here is a chart from the
paper.
It shows total
income for the 1% and 0.1% over the last hundred years. Their share
fell almost continuously from WWI to around 1980 , and it then went
back up over the 1980s and 1990s. Over the last decade and a half it
has been erratic with no clear trend.
This is total
pre-tax income, not just wage income, but income from employment
accounts for most of the income of the top 1%. As Chart 3 from the
paper shows, around ¾ of the income of the 1% comes from employment:
it is only for the top 0.1% that falls to just over half. As the
paper points out, only a tiny proportion of the 1% are CEOs. To quote
(references to studies omitted)
“Instead, many of
the top earners are working in highly profitable industries. 29% of
wage earners within the top 1%, and 44% of those in the top 0.1%,
work in financial services, compared with just 5% across the top half
of the income distribution….This speaks to the increasingly
well-documented international trend that increases in income
inequality that have taken place since the 1980s have been primarily
driven by increases in wage differences between firms rather than
within them. That is, the top of the income distribution seems
increasingly populated not by the most senior individuals from a wide
range of firms, but by the employees of a narrower group of
high-paying companies concentrated in, for example, the finance
industry.”
The paper includes a
lot of interesting detail, and at the end there is a very good
discussion of possible ways to increase top tax rates. However I want
to return to the theme of low real wage growth since the Global
Financial Crisis and 2010 austerity. As the chart above shows, the
income share of the top 1% has not been steadily increasing over this
recent period. This implies that increasing top incomes do not
account for much of the poor growth in median real wages over this
recent period. The Teichgräber and Van Reenen paper confirms this
(see Figure 3). Figure 5 shows that most of the decoupling for median
wages occurred in the 1980s and the first half of the 1990s.
Thus not only has
there been no decoupling between productivity and labour compensation
in the UK, but the decoupling caused by higher income inequality at
the top mostly occurred at the end of the last century, and does not
therefore account for the slow growth in median earnings in the last
decade and a half. So even for median real wages, the last dismal
decade and a half is mainly the result of poor growth in output,
rather than any shift to profits or growing inequality at the top. It
has been a dismal period in itself, but also in comparison with most
other G7 countries (for the US, see here).
This allows a nice
characterisation of three political periods in terms of the overall
economic cake and how it was distributed. Thatcherism, from 1979
until the mid-90s, was a period of growing inequality at the top as
well as widespread unemployment, but because overall growth was
reasonably good (compared to other G7 countries) real wages still
increased. So under Thatcher we had a growing cake shared more
unequally. Under the Labour government inequality at the top grew
much less rapidly and unemployment fell, and until the Global
Financial Crisis the economy continued to grow well. So under
Blair/Brown we had a growing cake, as well as a major improvement in
the NHS in particular. The big change under Conservative-led
governments since 2010 has been poor growth in GDP and productivity,
and a decline in public services. Since 2010 the cake failed to rise.
This is one reason
why it makes sense for Labour to focus on the poor growth record
since 2010. It also shifts the argument away from alleged (not
actual) Labour fiscal profligacy onto what really matters for voters
today, which is their stagnant or falling real incomes. When the cake
fails to rise, it makes little sense to talk about how what is left is
divided between wages and profits, but instead to talk about getting
a better recipe. Even if Labour’s recipe for growth is not totally
convincing, particularly when the Brexit ingredient is still in
there, voters will think they have little to lose by changing the
cook. But as this post also makes clear, if Labour gets into
government it has to decide whether it wants to improve the post-tax
incomes of the 99% by belatedly doing something about the shift in
incomes away from most workers towards the 1% at the top.
