Duncan’s Economic Blog

The Coalition: Favouring Capital over Labour

Posted in Uncategorized by duncanseconomicblog on December 15, 2010

Regular readers will know that I’ve been arguing for some time that the surest way to a sustainable economic recovery is through rebalanced domestic demand rather than relying on exports.

“Rebalanced domestic demand”, in practice, means two thing – a greater emphasis on investment and policies designed to lead to sustainable consumption – i.e. consumption based on decent wages not borrowing.

As the ebook put it:

In the 1920s much of Labour’s economic thinking was rooted in theories of under-consumption. The argument was that as one becomes wealthier, one tends to save a greater proportion of one’s income; so that vast disparities in wealth lead to too much saving in the economy as a whole, and not enough demand. Social liberal and liberal socialist thinkers such as J.A Hobson, E.F Wise and J. Strachey, associated with the Independent Labour Party, made the case for a more equal distribution of income not only on moral grounds, but also on economic grounds. A redistribution of the economy’s wealth towards the working class would lead to higher consumption and hence higher employment.

This insight still holds true. As we argued at the beginning of this e-book, the impact of rising inequality has been masked for the past three decades by increased borrowing by those further down the income scale. But increased personal indebtedness has proved unsustainable, and, given this difficulty, if living standards are to be maintained a solution will have to be found in greater wealth equality. Government intervention will be required – whether through increasing the minimum wage or using the power of public sector procurement to enforce a living wage – as will changes in the tax system to reduce taxes on low earners.

(Readers should feel free to substitute the “old school” reference to the “working class” with a more “next generation” category such as “squeezed middle” if they prefer.)

Browsing through the supplementary data to the OBR’s November Forecast, I came across their forecast of the “labour share” of GDP over the next few years.

Here it is – the share of GDP taken by wages over the next 5 years on a quarterly basis expressed as a percentage.  Wages as a share of GDP will drop from around 68% when the Coalition took office to about 64% by the time they hopefully leave.

So, there we have it – the Conservative-Liberal government’s policies will favour capital over labour. Who’d have thought it?


20 Responses

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  1. Tim Worstall said, on December 15, 2010 at 11:23 am

    Well, yes, but:

    ““Rebalanced domestic demand”, in practice, means two thing – a greater emphasis on investment ”

    But if you wanted to create more investment you’d want to increase the returns to investment, wouldn’t you? So an increase in the returns to capital brings about the very thing you desire?

    • duncanseconomicblog said, on December 15, 2010 at 11:30 am


      I’d more comfortable (economically speaking) with a rising profit share if that profit share was being invested. It isn’t. Instead we have huge corporate surpluses and a lack of investment.

      If the profit share was entirely invested, then yes increasing the wage share would lower investment. But it isn’t.

      So it’s two pronged – make consumption more sustainable byincreasing the wage share and use other policies to increase investment – and I’m all for directed tax cuts on investment, larger capital allowances, even subsidies to firms that invest.

  2. George said, on December 15, 2010 at 12:43 pm

    I thought this decline in labour share of GDP has been a well observed trend over the last 20 years in all major economies. European Commission figures show a sustained decline since 1980. On the face of it it is hard to lay it at the door of the coalition like it’s something new and deliberate on their part.

    I’d suggest this is only worthy of political comment if the trend has been increased directly by coalition policies. The selection of the date range on the graph doesn’t help us answer that question. That’s not an accusation of bias on your part; I understand you didn’t pick them.

    • duncanseconomicblog said, on December 15, 2010 at 12:52 pm

      It is a long trend.

      Good Glyn paper here:


      A 4% of GDP shift in 5yrs represents a large acceleration in that trend.

  3. Tim Worstall said, on December 15, 2010 at 1:49 pm

    Re the wage share there….If I’m recalling correctly we’re down to something like the levels of the 50s, maybe 40s. It was the 70s, when the wage share was at its peak: amazingly, coinciding with complaints about how no one was investing in British industry any more…..

    Can’t help but think there might be a connection….

    • duncanseconomicblog said, on December 15, 2010 at 1:53 pm

      Investment and the wage share have both been declining over the past thirty odd years.

      The relationship isn’t straight forward.

      Happy to dig out the longer term data this evening.

    • Neil Wilson said, on December 15, 2010 at 3:24 pm

      It also corresponds with significantly greater unemployment, greater underemployment, greater job insecurity, weaker unions, longer working hours, a greater gap between rich and poor and a lack of social mobility.

      Which is the more likely connection.

  4. Luis Enrique said, on December 15, 2010 at 4:05 pm

    I’d like to see that data stripped of wages in the financial sector. as has been pointed out elsewhere, today’s rich are more usually wage earners (just very high wage earners) as opposed to receivers of capital earnings. So that could make the underlying picture even worse! but can this make sense – what can be happening to the capital share of output, if it is not being invested, other than it being paid out in dividends and spent on consumption goods or lent to the government. Has there been a boom in dividends?

    • duncanseconomicblog said, on December 15, 2010 at 4:17 pm

      I feel a long post coming on, but will need time to put it together.

      I’m not actually sure, and would have to see how the data joins up, but it is possible we have seen a strange trend whereby the large and rising corporate surplus has kept on deposit (non-financial companies cash and deposits are up from £250bn in 2001 to £650bn in 2009 for example) and much of that then lend, via banks, to households to pay for consumption. (That would explain some of it)

      Which is a crazy way of ordering things.

      I certainly think financialisation and heavy investment in property (rather than business investment) play a role too.

      I’d love to see the wage share stripped of the finance sector too. Might be possible to build a series of that data.

      • Neil Wilson said, on December 15, 2010 at 5:52 pm

        That cash mountain attributed to Private Non-Financial Corporations and the drop off in Household sector borrowing is what comprises the Public sector deficit.

        What’s really shocking is that there is £1,452 billion of household debt outstanding and over the whole of the recession the sectoral accounts suggest that the household sector has reduced that by just £31 billion, ie about 2%.

      • Luis Enrique said, on December 16, 2010 at 2:09 pm

        it’s certainly a very hard set of circumstances to explain. we have a situation in which:

        1. profits are high, but firms apparently do not think returns would justify investing in expansion
        2. new entrants aren’t entering (and investing) to capture some of these high profits
        3. incumbents are not competing on price to erase some of those profits

        why aren’t high profits inducing the sort of behaviour one would normally expect?

        re: property. If prices are rising and people are selling houses does that show up as capital income and go into the capital share?

        I’m a bit wary of lending and consumption stories – possibly because I don’t fully understand them. If you look at an individual, you can’t really raise you level of consumption by borrowing so much as bring it forward. Once I’ve borrowed money and bought whatever, my subsequent consumption is lower because of having to repay the loan. So in aggregate I find it easier to believe that increases in consumer debt cause increases in consumption, than that high levels of debt have something to do with high levels of consumption.

        • Neil Wilson said, on December 16, 2010 at 3:30 pm

          It would probably be useful to look at the size of firm that is amassing this money and not spending it.

          I don’t believe profits are high for the majority of businesses at the moment. Most I speak to are scraping by, and certainly there are few if any clear opportunities out there to invest in a business.

          It may be that the 5% rule applies to businesses as much as it does to individuals.

      • cjenscook said, on December 16, 2010 at 5:29 pm

        Another data point is the secular decline in the ratio of ‘retail’ vs ‘wholesale’ deposits, which led – among other things – to the Northern Rock business model and so on…..

  5. duncanseconomicblog said, on December 15, 2010 at 4:55 pm

    Some interesting charts here:


    • totally oblivious said, on December 17, 2010 at 2:39 pm

      Really daft question Duncan but where does the other 35% of GDP go? Does the remainder go on to firm’s balance sheets or are taxes etc taken from this portion?
      Are profits going up or is more capital going on more expensive office space, business travel, improved HSE, more advanced technology etc?

  6. Luis Enrique said, on December 19, 2010 at 6:16 pm

    Duncan I suspect you are a Thoma reader but this is very relevant here:


  7. Paolo borioni said, on January 5, 2011 at 9:13 am


    I really agree on your approach to wage-led growth being the only possible way forward.
    Being italian, and very concerned with the stop to social mobility the last decades have brought about, I am very interested in similar data concerning the UK or in general other “developed” western countries. The issue has been mentioned above by Neil Wilson.
    Do you have such data somewhere, or do you know where I can get them?

    • duncanseconomicblog said, on January 5, 2011 at 10:11 am


      I have seen such data – I’ll try and dig it out.

      • Paolo borioni said, on January 16, 2011 at 7:31 am


        any data on social mobility yet? Or any idea of where you saw them/I could find them?

        Thanks for your patience

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