Stumbling and Mumbling

Author: chris dillow   |   Latest post: Wed, 12 Sep 2018, 02:30 PM


Stable exploitation

Author:   |    Publish date:   |  >> Read article in Blog website

Was Kaldor right after all, at least for the UK? This is one question posed by today's GDP data.

Kaldor proposed as a "stylized fact" that the shares of wages and profits in GDP are roughly stable over time. Today's figures confirm that this has been the case in the UK, at least in recent years. They show that the share of profits in GDP has been stable at just over 20% since the early 00s. The share of employees' compensation* has also been quite stable; it fell between 2009 and 2013 which was (arithmetically) the counterpart of higher taxes rather than rising profits. Incomeshares

Yes, we did see a massive shift in incomes from wages to profits between the 70s and mid-90s. But that was partly reversed in the late 90s. Since then, not much has happened to factor shares. This means the wage share is higher now than it was in the 90s and the profit share is lower.

All this is a stark contrast to the US. There, we've seen an increased profit share and increased (pdf) mark-ups since the 90s, and a decline in wages relative to productivity, all of which are symptoms of increased monopoly and monopsony (pdf) power.

Stock markets tell us a similar story. Since the mid 00s US shares have significantly out-performed UK ones**. There are several possible reasons for this. One is that investors believe that US companies have more monopoly power than UK ones - what Buffett calls economic moats - which means their profits are more sustainable and this justifies higher valuations.

Quite why this should be is another story. One possibility might be that US firms are more intangibles-intensive and hence benefit more from economies of scale than their UK counterparts. As Jonathan Haskel and Stian Westlake have pointed out, intangibles can increase inequality. Scxsp

Now, in saying all this I am not denying that the UK has a problem with inequality: a stable share of wages in GDP tells us nothing about the distribution of those wages. Nor of course am I denying that British workers are exploited. They are. But in aggregate they seem to be no more so now than in the 90s.

Instead, my point is that in the UK stagnant wages since the mid-00s has had more to do with flat productivity (until very recently) than with employers grabbing a bigger share of the pie. British capitalism is not like American capitalism. Whether this will remain the case is another matter.

* This includes employers' pension contributions as well as wages.

** My chart compares the FTSE small cap index to the S&P 500 because small caps are a better measure of domestically-based stocks than the All-share index which is dominated by multinationals. Given that the small cap index has out-performed the FTSE 100 since the mid-00s, the UK's under-performance would look even worse if we took the All-share index.

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