Today’s GDP figures suggest that even one of the left’s better economic ideas might not be effective.
I’m referring to wage-led growth - the idea that a shift from profits to wages will raise aggregate demand.
This would be true if the marginal propensity to spend out of £1 of wages is higher than the marginal propensity to spend out of profits.
For most of the 00s, this was in fact the case. Between 2005 and 2010, non-financial firms’ capital spending fell even though retained profits grew by 21.7% - implying a slightly negative marginal propensity to spend. However, during this time consumer spending rose 19.9% as disposable income grew 19.1% - an MPC of over unity*.
These numbers suggest a shift from profits to wages would raise aggregate demand.
But today’s news suggests the numbers are changing. They show that in Q2 nominal consumer spending rose only 0.1%; it fell 0.8% in real terms. But wage incomes actually rose, by 0.4% nominal. This suggests the marginal propensity to consume out of wage income is low now.
If this is the case - and the usual caveats apply to one quarter’s numbers - then policies aimed at boosting wages might not increase aggregate demand by much. This could be because people would use wage rises to repay debt.
By contrast, business investment rose 8% in Q2 despite a fall in profits. This would be vindication of wage-led growth, if investment rose because capitalists anticipated that higher wages would raise aggregate demand. But I don’t think this is the case. Instead, it could be that firms are finally starting to spend the cash they built up during the 00s.
It might be, then, that shifting incomes from profits to wages now would actually depress aggregate demand. Workers would use pay rises to repay debt, whilst capitalists might regard falling profits as a reason to hang onto their cash.
You might wonder how this story fits in with my long-held view that there’s a dearth of investment opportunities.
One possibility is that the dearth is diminishing. Another is that overconfident bosses are spending their cash piles on projects that might not turn out to be as profitable as hoped.
Whatever. My point is that wage-led growth could be an idea whose time has passed. Even if there were policies that would raise the wage share - which is not clear - doing so mightn’t raise aggregate demand. As I’ve said, it’s harder for governments to raise economic growth than generally supposed.
* Tables A22 and A40 of this pdf.