Sorry Ritchie, you cannot do this

Second, the proportion of profit in the economy has increased dramatically. Now admittedly, I can’t find the data tonight and it’s tedious to extrapolate it form the ONS web site (which is a nightmare). So I’ll quote from Howard Reed writing on this issue for the TUC instead, who looked at pretty much the inverse ratio, the wage share over time:

The wage share of income is not the inverse of the profit share of income. So, sorry laddie, but you just cannot make this claim.

Income is, in the sense that we are talking here, divided into the following:

Wages.

Employer paid taxes on wages.

Consumption taxes

Corporate profit.

Mixed income (this is income from self-employment. We don\’t really know how much of this is returns to capital or returns to labour. So it is measured separately).

And some other stuff. Like Ritchie I\’m not bothering to look up the full set of figures.

Now, over the decades that Howard Reed has looked we\’ve had significant changes in employers\’ NI. Again, without looking it up, it\’s from something like 6 or 7% to the 13.8% today. And I vaguely recall that it used to be capped but is no longer.

Further, consumption taxes have radically changed. When you look at the graphs used you\’ll see that the peak of the wages share was around 1975 or so. Which is usefully just around the time that we introduced VAT. We did have some sales taxes before that but nothing like the rate of breadth of VAT, further, the VAT rate has risen substantially since.

I don\’t know but I\’d be willing to bet that self-employment has grown substantially over these decades as well, leading to a rise in mixed income.

All of which will depress the wages share of income. But which won\’t increase the profit share of income at all.

It\’s entirely possible that the profit share of income has risen. But the figures Ritchie is using here don\’t show it. For he\’s either ignorant of the figures he\’s quoting or deliberately doing it to mislead. As is Reed but then at least Reed is going it for money from the TUC and thus has an excuse. Selling your professional reputation for geld is an excuse isn\’t it?

10 comments on “Sorry Ritchie, you cannot do this

  1. In the period 1975-9 a lot of companies were making losses (often hidden by the use of historic cost accounting instead of replacement cost accounting during a period of hyperinflation) .
    According to the Grauniad tax in 1974-5 tax was 42.1% of GDP, Ritchie’s pal says wages were 64.5%.
    So self-employed income plus company profits combined was MINUS 6.6%.
    Of course profits as a share of GDP have risen
    What Ritchie is hiding is that they HAD to rise to prevent unemployment reaching 60% when all private sector companies went bankrupt.

  2. Pingback: UK GDP by Income « uneconomical

  3. As I said last time ‘compensation of employees’ includes employers NI as Britmouse’s excellent charts show.

  4. I’m getting a bit confused by profit as a category here. When we talk “corporate” profit, okay, that’s the profit on the balance sheet of some particular corporation. Which is paid to shareholders who are mostly other corporate entities(?) in which case, most of it doesn’t take part in consumption, in which case, it’s irrelevant because it consumes no economic output. It is simply money in transit to other corporate entities. Or, it may be in transit to, say, a pension fund, which then pays it out to pensioners. Which category do private pensions (for instance) go into? They’re not wages, but they’re individual consumption money.

    So, bit confused here. Income to individuals- wages and private profits and rents, are apples to corporate profit oranges. Aren’t they? Can we thus compare them meaningfully as proprrortions of the economy?

    ?

  5. @ Ian B
    The breakdowns quoted by Murphy and Btitmouse don’t include dividend income. Anyhow as (i) dividends asre less than corporate profits because some corporate profits are used for investment and (ii) dividends are generally paid in the following year, after the auditors have checked whether the company has any after-tax profits available to distribute as dividends you can’t get any sensible numbers for dividends as a % of GDP.
    You really shouldn’t admit to confusion over such a simple point if you want to lecture us on economics.

  6. It was rhetorical confusion. I’m trying to point out that most of these categories are abitrary. The majority of arithmetical economics is seeing pictures in the flames or, to twist the metaphor, photoshopping the flames to create particular pictures.

  7. @ Ian B
    Sorry, I took you literally because I was tired and didn’t spot the rhetorical flourish. I only drift onto blogs when I feel I need a break, hence almost all my comments are from a “below par” individual.
    Actually my post just supports your view that the categories are arbitrary while explaining one of the many such.

  8. John77,

    Sorry myself. It’s a bit of a bad comment from me, just expressing exasperation that people like Ritchie pluck two virtually arbitrary numbers out of the statistics and think they can say something meaningful by twiddling with them. But I didn’t put it very well.

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