What is happening to profits and wages? On the one hand, Labour complains about the squeezed middle whilst the broader left complains about the fall in the share of wages in GDP since the mid-70s. But on the other hand, Allister Heath says the situation for corporate profits is "horrendous."
So, who's right? The answer is: both, to a point. My first chart shows income shares since quarterly ONS data began in 1955*. This shows three things:
- The wage share fell between 1975 and 1997, but recovered thereafter, only to slip back since 2009.
- The profit share tends to be cyclical, but is slightly higher now than in the low-points of the downturns of 1975, 1981, 1992 and 2001. These numbers, though, include the profits of oil companies, so might overstate the health of the non-oil sector.
- Other incomes (rent and net taxes on production) have trended upwards. They jumped after 2009, I suspect because of the rises in VAT. In this sense, both capitalists and workers have suffered because the other incomes wedge has risen.
We can look at this another way. Back in 1938 Michal Kalecki proposed a simple framework for thinking about the share of wages in GDP.
Start from the national income identity that GDP equals wages (W), profits (P) and other incomes (O), and also equals gross final expenditure (what he called proceeds) minus imports (M). This means:
P + O = (k-1)(W+M)
where k is the ratio of proceeds to (W + M). He called this the degree of monopoly. You can think of it as the mark-up over costs**.
This means we can write the wage share as:
w = W/W + (k-1)(W+M)
If we let j = M/W, then this gives us:
w = 1/1+[(k-1)(j+1)]
You can see that the import-wage ratio has trended upwards, reflecting the increasing globalization of the supply chain. But within this, there have been spikes, due in large part to jumps in oil prices.
The degree of monopoly slumped in the 70s, as wage militancy squeezed profits, but trended upwards until 1997 since when it has trended downwards.
You can think of this as the interplay of two factors. On the one hand, the fact that capitalists have increasingly had the whip hand over labour has tended to raise the degree of monopoly. But on the other hand, international competition has tended to erode their monopoly. Since the mid-90s, the latter force has predominated.
This chart tells us that since the mid-00s, the import-wage ratio has risen, thanks I suspect to higher commodity price whilst the degree of monopoly has fallen. This means wages have been squeezed by higher oil prices, rather than the power of capitalists.
The bottom line here is simple. Both capitalists and workers have cause for complaint. Capitalists have lost pricing power - the degree of monopoly has fallen - which has tended to depress the profit share. But this has not benefited workers because instead the "wedges" of other incomes and higher imports have depressed their share.
* The numbers come from tables C1 and D here. GDP is YBHA, imports are IKBI, wages are DTWM and profits are CGBZ. For my purposes, all the other numbers are derived from these.
** You might object that imports are not a cost for capitalists to the extent that they comprise consumer goods. You'd be wrong. If workers buy domestic consumer goods, their wages are not a cost to capitalists in aggregate. This is because what they lose through the back door in higher wage costs is recouped through the front in higher spending. If, however, workers spend their incomes overseas, then wages are a net cost. In this sense, all imports are a cost to UK capitalists, either directly (imported materials) or indirectly.