The wage problem

Hopi expects that Ed Miliband's speech on wages next week could say that "not enough of our national income has been going to the many." A glance at the national accounts data, however, suggests this claim is problematic.

My chart shows wage and profit shares since quarterly data began in 1955.It shows that the wage share - the proportion of national income going to the many - is now around its post-2000 average. Polly's right to say that the wage share fell "long before the crash". But it did so between 1975 and 1997. It's the profit share that is unusually low by recent standards, not the wage share.

This shouldn't be surprising. For one thing, the profit share is partially cyclical; it tends to fall in recessions and slowdowns. And for another, productivity has fallen, which suggests that one way in which capitalists exploit workers - getting them to work more intensively - has weakened in this recession.

Duncan is right to say we have a wage crisis rather than a cost of living crisis. But wages are low because the economy is weak, rather than because capitalists have been grabbing a bigger share of the cake recently.

All this said, you could still argue that the wage share is too low and the profit share too high, in two ways:

1. Any amount going to profits is unjust. This is because profits are a sign that workers are being exploited (pdf), and capitalists do nothing to justify such a return. There's good evidence, for example, that firms with external shareholders have lower capital spending, worse corporate culture and inadequate control over management.   

2. Even though the profit share is quite low by recent standards, a shift in incomes from profits to wages might be a good thing, if the propensity to spend out of wages is higher than that to spend out of profits.

Claim 1 is, I fear, too radical for Miliband junior. And claim 2 is probable rather than certain.

So where does this leave us? Simple. The most obvious solution is the wage crisis isn't to shift the share of incomes - I share Hopi's scepticism about micro-interventions - but simply to increase the demand for labour through macroeconomic policy. Sadly, though, with monetary policy of dubious efficacy, looser fiscal policy ruled out - because it just is, all right? - and jobs guarantees used to harass the jobless rather than to provide an employer of last resort, such policies probably won't be equal to the scale of the task.

Comments

[Anonymous]

Presumably the profit figures used in the analysis are calculated AFTER interest payments due to finance creditors have been deducted.

If so, then the analysis might be improved by comparing value-added appropriated by capital to value-added appropriated by labour. Using this metric, the capital appropriation would be the sum of interest paid to finance creditors and pre-tax profits. The modified metric could well show that capital is doing better than the analysis indicates.

For completeness sake, it MAY be useful to incorporate the government's share in value-added (ie tax).

[Jim]

Um, you've forgotten the other part of the National Income calculation - taxes. Could you enlighten us as to whats happened to that over the same time period?

[Neil Wilson]

The problem is that data is produced for the income measure of GDP which has a different target than the one in this article.

Government doesn't hoard the 'taxes on production'. They offset its expenditure on goods and services - which are people's wages and profits.

The accounts system doesn't capture that because the split on the numbers measure 'Gross value add', not 'Gross Domestic Product' allocated to wages and profits.

Similarly the 'other income' is the profits and compensation from the businesses of sole traders. That has steadily grown over the years. And this is classified as 'entrepreneurial income' in the national accounts systems.

So I would suggest that the premise of the article is incorrect, since the numbers used do not capture accurately the split of *GDP* between Wages and Profit.

[Chase]

Isn't it a bit of an assumption to presume income going to labor instead of rent is 'many' vs the 'few'? I would think you have to look at share of labor income going to the few vs the many. In the U.S. wages for executives have skyrocketed while lower end wages have stagnated. Seems incomplete.

[aragon]

Duncan is wrong is a relative inflation problem, especially of the price of the basics vs the low income (as opposed to all incomes).

For example 10% (compounded over years) energy inflation especially when applied to the standing charges.

And what are profits with the extent of intracompany transfers and tax avoidance.

http://www.independent.co.uk/news/uk/politics/eurobond-tax-scandal-tax-avoidance-figure-is-just-the-tip-of-the-iceberg-margaret-hodge-tells-hmrc-8909553.html

But the Two Ed's analysis and actions are superficial, hence the twenty month energy price freeze and one year living wage rebate.

Superficially attractive but ineffectual.

[Deviation From the Mean]

Useful and interesting information.

I have to agree with chase though about the breakdown of wages. The story of the Neo liberal period has been the massive remuneration going to the CEO's and high management.

I think Simon Mohun's attempts to develop a 'class' definition of profit is the correct basis that Marxists should be developing their theories.

[Prateekbuch]

Chris, unless you account for the distibution of the wage share, surely it is not enough to take the aggregate share going to wages and say "enough is going to the many?" A absurd example would be if one bloke - let's call him Mr Rich - took home all the wages in the land, leaving none for everyone else, but he had a pay rise, the wage share would rise, no? An analysis of what's happened to median salary over the same time period - a bit more sophisticated than my attempt at http://planc.socialliberal.net/on-wages-income-and-employment/ - might show something different...

[chris]

@Chase, Prateekbuch - yes, the share of wages going to the v. rich has risen, which means my chart flatters the income going to the many.
http://topincomes.g-mond.parisschoolofeconomics.eu/#Database:
And of course, I believe there's no good justification for that. However:
1. this is a long-run development, and not merely an artefact of the recession.
2. Ed 's not going to do much if anything about this.

[Ben Southwood]

All plausible and convincing except that high propensity to spend is good. High propensity to spend is bad for civilization and society in the long run, and it's indeterminate whether it's good for the individuals right now (depends on their utility functions). So on balance we probably want less spending, although we might prefer less consumption coming voluntarily to forced saving for a given level of consumption.

[Art]

It would also be helpful to see the percent of corporate profits that ultimately flow to the wealthy versus those that flow to the average citizen.

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