Wages, investment & the state

Adam Ramsey says we are seeing “the biggest transfer of wealth from ordinary people to the mega-rich that we’ve seen since the Enclosure Acts”.
I suspect there’s an element of hyperbole here, but he has a point: real wages have fallen in the last year, even though overall GDP is up.
What’s not appreciated here is that this is closely related to another key economic fact - that capitalists are not investing their profits.
To see this, just remember the elementary national accounts arithmetic. GDP is equal to consumer spending (C), government spending (G), investment (I) and net trade (X-M). It is also equal to the sum of incomes wages (W), profits (P) and taxes (T), which means:
    C + I + G + (X-M) = W + P + T.
Rearranging this gives us:
    W = C + (I-P) + (G-T) + (X-M)
The interesting thing here is the (I-P) term. This tells us that wages grow if investment rises relative to profits. This is common sense; if capitalists invest, the demand for labour grows. But in recent years, capitalists have not been investing but have instead hoarded their profits.
This is related to another fact underpinning workers’ raw deal - the global excess supply of labour created by the entry of China and India into the world labour market. This excess supply bids wages down which, ceteris paribus, raises profits. But it also makes the UK an unattractive place to invest in low-wage intensive projects. Global cheap labour is thus one factor - of many - behind the fall in (I-P).
 Now, you might think that this identity opens up a case for expansionary fiscal policy; a rise in (G-T) can offset the depressing effect of the rise in (I-P).
Not necessarily. Even if we ignore the  anti-Keynesian points (that fiscal policy might raise imports and/or saving), there’s a problem here, evident in my chart.
This shows that the share of wages in GDP is, if anything, negatively correlated with the share of public spending in GDP. For example, government spending has soared since 2000-01 but the wage share has fallen.
Big government, on its own, is not necessarily in the interests of workers, at least vis-à-vis capitalists - or, at least, it's not so strongly in workers' interests as to offset countervailing adverse influences.
This is consistent with both pro- and anti-Keynesianism. To pro-Keynesians, it’s because the higher aggregate demand caused by loose fiscal policy also helps to raise profit margins. Yes, this improves wages to the extent that it increases the size of the economic pie, but it doesn’t increase labour’s share of that pie. To anti-Keynesians, it’s because loose fiscal policy can crowd out capital spending, so the pie doesn‘t even increase.
In the case of balanced budget increases in spending, it’s consistent with what we know about tax incidence: that this often falls upon workers, not capitalists.
For my purposes, though we don’t need to adjudicate here. The point is that loose fiscal policy and big government are not, on their own, enough to improve the fortunes of workers relative to capitalists.

Comments

[Agog]

The correlation was very high under Major, and under Heath->Wilson according to your chart. Why so?

[Schismatism]

@Agog the writer here isn't accounting for what the rise in government spending is going towards. Simply spending more on the wars, for example, won't necessarily lead to redistribution here at home. The purchases of goods made in the US for the war effort are minimal compared to the cost of the war effort going towards highly skilled laborers (contractors, etc) instead of towards wealth creation downwards, or the cost is literally being spent outside the US. Of course such a thing won't affect wages here at home.

[chris]

@Agog - the recession of 1990-92 saw govt spending rise and labour hoarding that raised the wage share and squeezed profits. The subsequent recovery reversed these trends. Ditto for ther 1974-75 recession.

[Luis Enrique]

I'm not sure about this - as you show, the accounting identity has the same relation between W and (G-T) as it does between W and (I-P), and can be arranged any which way: you could have written (G-P) and (I-T). You show that (G-T) doesn't appears to have much to do with the share of wages in GDP, so why should we think (I-P) will have? And would you have written that wages rise if taxation falls relative to investment?

I'd like to know more about what's behind the share of income data. How much is explained by people choosing to declare income as capital rather than wages, for tax reasons? Where does the capital share go? I don't like thinking of the labour share as going to workers and the capital share to capitalists - after all, bankers and their bonuses are in the labour share and the earnings of the bloke who owns the local kebab van might be counted as capital income, for all I know. And of course pension funds receive dividend income, and there's demographics and all sorts underlying changes there, I imagine. On the other hand, perhaps the bottom line is a higher capital share benefits the rich.

I know Andrew Glynn wrote something on the declining labour share - anybody know any good references that go into the kind of detail I'm after?

[Mark Wadsworth]

Chaps, you are missing the point.

He said: “the biggest transfer of wealth from ordinary people to the mega-rich that we’ve seen since the Enclosure Acts”.

And that is exactly how it works. You can tax incomes as much as you like, but the bulk of income tax revenues just go into pushing up house prices (long and complicated story) especially if we have restrictions on new supply of housing (The Hallowed Green Belt).

The last ten or fifteen years have seen the biggest transfer of wealth imaginable, and hey presto, it's often the people nominally paying the most income tax who were the biggest beneficiaries (the tax they paid is rather less than their unearned house price gains - which they are now desperate to lock in).

[toryboysnevergrowup]

And the government response is to reduce the tax on corporate profits (and announce further reductions) regardless of whether they are reinvested or not. This says a lot about the motivations of the present government

[Mark Wadsworth]

"And the government response is to reduce the tax on corporate profits... regardless of whether they are reinvested or not."

By definition, there is NO corporation tax on reinvested profits, whatever the rate is (although there are timing differences with capital allowance items and a shed load of silly disallowances).

Corporation tax is ONLY charged on surplus profits which are not reinvested (i.e. rolled up as cash or paid out as dividends or used to acquire pre-existing companies).