Is the stagnation in productivity and squeeze in real wages good for the Tories? I ask because of a fact pointed out by Andrew Pickering and colleages in a new paper - that there's a strong positive correlation in developed economies between the share of wages in GDP and the size of government. Both increased in most OECD economies between the 1960s and 1980s, and both have fallen since in most.
You might think this is because both are counter-cyclical; in recessions, the wage share and size of government both increase. However, Pickering and colleages point out that the correlation holds even controlling for the size of the output gap, which suggests there's more than mere cyclicality going on.
There are two things here.
One, which they stress, is that the wage share is a measure of the relative cost of government. Because many government services are labour-intensive, falling wages reduce the relative cost of government, thus allowing the state to shrink.
In this context, falling productivity in the private sector actually helps the Tories because it puts Baumol's cost disease into reverse. When productivity grows faster in the private sector than public, the relative cost of public services rises, tending to increase the size of government. But private sector productivity is now falling whilst that in the public sector is rising; the data (if you believe them) shows that government output has risen 3.7% in the last two years whilst public sector jobs have fallen. This is reducing the relative cost of government, thus making it easier to shrink the state.
You might think this is a relatively benign thing. If it's cheaper to provide education and health services, a fall in government spending as a share of GDP is no problem.
True. But I fear there might be another factor at play, to the detriment of social democrats.
It's that the demand for government might be income-elastic. If you're struggling to pay the gas bill or to buy petrol to get to work, you'll be more opposed to paying tax (and be less pro-social) than if you're more comfortable.
In this regard, the "squeezed middle" might be no friend to social democratic objectives.
Perhaps, then, falling real wages are more helpful for the Tories' cause than generally supposed.
Another thing: the share of wages in UK GDP has been quite stable lately. But I don't think this affects my point - not least because, if we do get a recovery in GDP whilst high unemployment holds down wages, the wage share will fall.