Profits vs. Wages | Deloitte UK has been saved
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One of the most powerful economic trends of the last three decades has been the growth in the share of global GDP accounted for by profits.
This has happened in most Western economies and across the developing world. In the advanced economies corporate profits now account for about one third of GDP, up from about a quarter in 1960. Profits for financial businesses have risen faster than for their non-financial counterparts.
But if the corporate sector is taking a bigger chunk of GDP in profits, whose share is shrinking?
Labour has been the big casualty. Its share of GDP, accounted for by wages and salaries, has been falling in most advanced countries since the 1970s.
In the UK the wage share has fallen substantially since the mid-1970s, although the trend has partially eased since the financial crisis. Wages share of UK GDP peaked in 1975 at 65% and had falling to around 53% by 2008. Over the same period profits share of national income rose steadily.
In emerging economies the wage share of GDP has, if anything, fallen even faster than in the industrialised world since data started to be compiled in the mid-1990s.
Over the economic cycle profits are more volatile than wages. When the economy turns down profits are squeezed more than wages; when the economy booms, profits rise faster than wages.
Yet the global financial crisis has led to only a short-lived squeeze on profits in most economies. In this area, at least, there has been no rebalancing. The long term uptrend in profits’ share of GDP, and the downtrend in wages, has resumed.
The wage squeeze has been unevenly distributed across the workforce. Less skilled, lower income workers have been fallen furthest behind while those in higher skilled, higher income occupations have seen their wage share of GDP rise.
So, if we strip out the highest income earners – including executives receiving bonuses and stock options - the squeeze on wages as a share of GDP for middle and lower income workers has been even more severe than the headline numbers suggest.
To a Marxist this all adds up to a simple story of capital prospering at the expense of labour. But the fact this process has happened in economies as diverse as the US, Sweden, Turkey, Argentina and China points to a more complex truth.
A series of powerful forces are at work. Technological progress, globalisation, the expansion of financial markets and the decline of unions have all increased the pressures on lower-skilled labour and bolstered the returns to capital - and to skilled labour.
The causes may be complex, but the results are clear. An upheaval in the allocation of GDP between labour and capital has had profound distributional effects. The winners have been shareholders and highly skilled workers, especially in financial services. The unskilled and those with no share in profits have lost out.
One day there could be a political backlash, leading to higher business taxes on profits. But the general trend in recent years has been towards lower business taxes.
Given the persistence of the forces involved the long march of profits and the long squeeze on wages may well have further to run.
Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.