In which we shoot down one of Ritchie\’s assertions

That figure is the share of US national income that goes to workers as wages rather than to investors as profits and interest. It has fallen to its lowest level since records began after the second world war and is part of the reason why incomes at the top – which tend to be earned from capital – have risen so much. If wages were at their postwar average share of 63 per cent, workers would earn an extra $740bn this year, about $5,000 per worker, according to FT calculations.

OK, well, the FT gets that wrong because income and profits are not the binary division of national income. But us profits as a share have indeed been rising, so we\’ll, for the moment, let them get away with that.

However, Ritchie then goes on to comment that:

And you wonder why people are angry? They know the system is abusing them, because it is. And they know that this is straightforward exploitation. Because it is.

And it’s worse in the UK. Our labour share is 53% (from memory).

No wonder Occupy resonates.

Now, where’s the Labour Party?

And it is indeed true that the labour share of income in the UK is down. However, as before, it\’s not actually a binary division into labour and capital shares. It\’s labour, sales taxes, subsidies, self employment income and employers\’ national insurance plus the return to capital. Some of self-employment income is profits and some isn\’t, so adjustments should be made for that. Ooooh, lookie here:

There are only a few countries
where the profit share seems to have lacked an upward trend: Belgium, the Netherlands,
Portugal, Sweden and the United Kingdom (bottom panel of Figure 1).

That\’s after the adjustment.

So, if the labour share of income has fallen but the profit share hasn\’t risen, what has happened?

Well, obviously, employers\’ national insurance has risen and so has VAT.

Have employers\’ national insurance and VAT risen? Why, yes, they have.

That\’s where that missing part of labour income has gone: in taxes, to government.



6 thoughts on “In which we shoot down one of Ritchie\’s assertions”

  1. We could abolish employer’s NI and load it all onto the employees’ side.

    Assuming tax incidence of ER’s NI is mostly on the employee, that will give a big increase in Murphy’s measure of the pay to labour, without actually changing anything.

  2. I wonder if there is not a simpler reason for the apparent increase in the proportion of profits which go to capital.

    The principal way in which an individual can increase their productivity is because of the introduction of capital.

    Thus, the introduction of a spade, say, (which would require a return on capital,) will devert the percentage of profits away from labour if the previous method was using one’s bare hands.

    Suppose we introduce a mechanical digger. The (fewer) workers’ wages may have doubled, but the proportion of profits going to capital will have increased. Surely, this is what “growth” is all about?

  3. There is another share – customer savings.

    Back in the 1920’s Henry Ford improved production methods which allowed him to increase profits, reduce costs and increase wages.

    Increased wages made workers customers which increased production which reduced costs etc…

    It is interesting that new plant was built from profit not by ‘leveraging’ debt.

  4. Nick:

    Of course, you’re right. And, as an extreme-case example, there are some jobs, processes, even industries which couldn’t exist without the aid of capital (but with which such assistance are able to provide something of value to consumers as well as furnishing remunerative employment to workers and profit to owners/shareholders (not to mention a share of the preceding as taxes to government.

  5. JimS,

    The whole “Henry Ford increased his workers’ wages to turn them into customers” story is rubbish. If a company’s only customers were its workers, it would go bankrupt.

    I understand that’s not exactly what you’re claiming but the logic’s the same.

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