UK vs US capitalism

Frances Coppola says that in developed economies:

Wages have not kept pace with productivity for the whole of the 21st century. Workers' wages simply don't reflect their marginal productivity any more.

However, this is perhaps not so true in the UK as it is in the US. My first chart compares the real wages of full-time men in skilled trades (which I'm using as a proxy for median wages)* to labour productivity. This shows that since data began in 2001 real wages have indeed lagged behind productivity.

However, most of the gap is because real wages fell between 2008 and 2013. Since then, wages have actually risen faster than productivity.

I suspect the story here is that sterling’s fall in 2008 cut real UK incomes, and wages suffered from this.

My second chart is consistent with this. It shows that the shares of wages and profits in GDP haven’t budged much over the last 20 years. Although the share of wages in GDP fell after 2009, this only reversed a rise in the mid-00s. The wage share is now much the same as it was in the late 90s.

This is a marked contrast to the US, where the wage share has fallen this century.

The difference, I suspect, lies in the fact that monopoly power has risen in the US but not in the UK. The US has seen a rise in “superstar firms” (pdf) in recent years whereas the UK has not: there’s no UK equivalent of Apple or Microsoft. Yes, I know, some people quibble with this. But the evidence for it doesn’t lie only in academic studies. It’s also in the stock market. In recent years, the US market has out-performed the UK. One reason for this might well be that investors have been attracted to US companies which offer what Warren Buffett calls economic moats – things that allow firms to fend off competition.  

In saying this, I’m not denying that UK workers are exploited; they are (pdf). Nor am I disputing Frances’ dismissal of marginal productivity theory. My point is simply that, right now, there is a difference between UK and US capitalism. Whereas US capitalism is a story of increasing monopoly, the UK story is more one of stagnation.

* Average wages might be distorted by changes in very high wages. There is also annual data on median wages from the ASHE, but these contain a few breaks in the series, although they show a similar picture to my chart.  

Comments

[Patrick Kirk]

https://www.nytimes.com/2017/09/12/business/economy/income-rebound-recession.html?_r=0

US median incomes are far higher than in the UK and are higher than they were in 1999.

Add to that US housing being plentiful outside a few big cities and you see why Americans have a higher standard of living.

Perhaps the reason US wages are falling compared to GDP is that GDP is growing even faster?

[nicholas]

An interesting contradiction between this post, and Chris's post a few days ago about immigration not affecting wages.
Basic economic theory does indeed suggest that wages are related to labour's marginal product. It also says that labour's marginal product will fall if the quantity of labour rises without equivalent increases in other factors of production such as capital and land. So if wages are related to labour's marginal product in the UK, it would be very surprising if increasing the labour supply did not result in a fall in wages.

[A]

Chris appears completely content to trade away his nation's heritage, culture, history and demographics for a GDP boost. And yet he has the cheek to suggest it's conservatives who know the price of everything and the value of nothing.

[B.L. Zebub]

Chris,

If we are focusing on differences between the US and the UK, then perhaps we should not overlook this one: in Coppola's second chart (with the evolution starting in the mid to late 1940s) for the US one can observe that productivity growth and her proxy for wages growth largely coincide in the first 10-15 years. It is then that the charts increasingly diverge.

This shows that productivity growth does not need to outstrip wages growth.

Whatever the brief ups and downs in your UK chart, in it productivity growth always exceeds wage growth. This doesn't need to happen, but it's happening, just like in the US case.

I suggest that this secular similarity is at least as important, if not more, than those short-lived differences you highlighted.

[Nanikore]

"The US has seen a rise in “superstar firms” (pdf) in recent years whereas the UK has not: there’s no UK equivalent of Apple or Microsoft."

UK SME's, once they reach a certain size get swallowed up by foreign firms. Banks in the UK are also reluctant to invest in SME's - this could be part of the reason. There seems to be a problem of access to long term investment, rather than operational, capital.

So perhaps the US superfirms dominate the UK market as well as their own.

[Walex]

The first point is that what is reported as "GDP" has become a pretty mystery, because a number of the "methodological" changes have been used to "improve" it. In particular quite a bit of non-final output is now counted as final, a lot of inputs in the service sector are counted as outputs, and in some countries "hedonics" count quality improvements as increases in "GDP".

Since in particular the USA "GDP" is far more strongly influenced by "hedonics" than the UK "GDP" (even if UK "GDP" has also been "improved" by various "methodological changes") they cannot be compared.

Also F Coppola herself has pointed out that an ONS study shows that most of the changes in aggregate labour productivity in the UK reflect a fall in scottish oil production, where the number of barrels per year extracted per worker has fallen quite a bit over the past 15 years.

In general in political economy studies when looking at market moving and vote moving indices like "GDP" and "CPI" and "unemployment" (never mind those for even more metaphysical abstractions like "LIBOR" or "*the* interest rate") it is necessary to avoid taking them at face value and peek behind the curtain and disaggregate.

Our blogger is fond of proposing for discussion on this blog various data relationships taking the validity of the data for granted and in the aggregate too, but while that fits the format of a blog post, it is not really satisfying.

[Walex]

As to drawing conclusions from aggregate unexamined data, an analyst (Tim Morgan) at a City firm in report wrote:

«how policies have been blind-sided by distorted data
The reliable information which policymakers and the public need if effective solutions are to be found is not available. Economic data (including inflation, growth, GDP and unemployment) has been subjected to incremental distortion, whilst information about government spending, deficits and debt is extremely misleading.»

And this I think is quite optimistic, as repeatedly in the past 20 years various troubles have shown that information about agreggate *private* spending, deficits and debt is even more misleading than that about the smaller governmental ones, with the accounts of many large corporates being hugely "optimistic" (e.g. Worldcom, Enron), and those of many large financial companies (e.g. Lehman, RBS) being at best big ticking bombs.
The balance sheets of major central banks have not ballooned by many times over the past 20 years because of nothing...

NOTE: also "policies have been blind-sided by distorted data" is quite optimistic, as I would rather think that "data have been blind-sided to support distorted policies" :-).

Consider this: in 2006-2007 a fairly significant part of GDP growth was growth in corporate profits, and of these financial business profits had become 40% (and probably a much larger percent of overall business profit growth) and it turned out later that they were largely imaginary. A retired Fed economist has pointed out that at least in the USA the 1994-2010 period was "anomalous", for "GDP" see figure 5 here:

noisefromamerika.org/articolo/why-the-fed-s-zero-interest-rate-policy-failed

[Walex]

One of the questions I ask myself is whether government and central bank analysts "drink their own Kool-Aid" and use the "improved" statistics for their work. Of course that would be quite confidential, but there are occasional leaks that show that at least the USA Fed have their own internal statistical department, and sometimes the BoE do the same (e.g. their amusing 2011 survey on "forbearance").
Also quite famously A Greenspan used sales of male underwear as a more reliable proxy to actual economic conditions.

[Walex]

«Banks in the UK are also reluctant to invest in SME's»

Only the very passionate would invest in SMEs in the UK when property gives returns of 100% per year, and even the Chief Economist of the BoE has recommended liquidating investments in businesses to buy property:

www.theguardian.com/money/2016/aug/28/property-is-better-bet-than-a-pension-says-bank-of-england-economist
«Haldane believes that property is a better bet for retirement planning than a pension. “It ought to be pension but it’s almost certainly property,” he said. “As long as we continue not to build anything like as many houses in this country as we need to ... we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north.”»

For banks also lending secured by property is effectively fully guaranteed by the BoE, so they would be mad to waste their capital to back lending to SMEs.

[Walex]

«lending secured by property is effectively fully guaranteed by the BoE»

Please read air-quotes around "secured". I wish there was a special character for "air quotes", even if I tend to use the double-quote/inches character for that, as in "CPI" for example :-)

[Walex]

«mad to waste their capital to back lending to SMEs.»

Currently commercial banks are mostly mortgage shops, where they make a government backstopped 3% spread, plus on the side they sell personal loans and credit cards, where they have a riskier but bigger spread of 6% to 18%.
IIRC for english commercial banks their mortgage lending is 5 times larger than business lending.

[lbc]

UK = aristocracy + stagflation