[Skip to Content]

Register to receive the weekly OMFIF Commentary, on the stories behind global economic and financial news.

* Required Fields

Member Area Login

Forgotten Password?

Forgotten password

Analysis

Income gap poisons politics

Rebellious citizens are fighting back

by Brian Reading in London

Fri 19 May 2017

Brianreading Banner

Income is split between labour and capital, what you earn and what you own. The French economist Thomas Piketty, in his book Capital in the Twenty-First Century, observed that wealth inequality is increased when the rate of return on capital exceeds the rate of economic growth. One of the chapters in the IMF’s April 2017 World Economic Outlook could have been entitled ‘Income in the Twenty-First Century’. It documents declining wage shares in nominal income almost everywhere.

The downward trend in advanced economies began in the 1980s. It started a decade later in developing economies. The message is the same – increased inequality. If real wages grow less than real output the labour share of income diminishes. These developments underscore the acrid divisions between haves and have nots that now poison politics in most advanced economies.

The gap between the growth (or lack of it) in productivity and the lesser increase (or decrease) in real rewards from working, relative to rewards from owning, exacerbates inequality. The causes are far from simple and almost impossible to disentangle. Technological advances and globalisation play their part. Self-employed income is not included as statisticians cannot divide it between labour and capital. Measuring productivity in service industries, especially in non-market public services, is near impossible. Quantity is a proxy but quality may be inversely correlated. Supposedly slower productivity growth, predating the global financial crisis and great recession, may be partly blamed on employment shifts from manufacturing to private and public services.

Technology has reduced the cost of capital equipment, allowing companies to be more productive at lower cost. The elasticity of substitution between capital and labour has shifted in favour of capital. The result is that middle-skilled repetitive jobs in high-wage advanced economies have either been replaced by robots and computers or outsourced to low wage emerging ones. The fall in wage share, and growing income inequality, has led to a middle-class squeeze. The highly skilled few are better paid than ever. Low-paid domestic service workers who don’t compete globally are not much worse off than before. The middle shrinks between the two.

Perhaps the savings glut has something to do with wealth and income disparities. The monetary antidote to fiscal austerity, quantitative easing and zero-bound interest rates, produces a lethal combination of asset-price inflation and product-price deflation.

Remarkably, UK unemployment is at its lowest in 42 years, inflation has modestly rebounded yet wage growth remains anaemic. What has happened to Nairu, the non-accelerating inflation rate of unemployment? Slower productivity equals more jobs but less pay.

Increasing inequality in income and wealth divides. It is the common denominator in contemporary politics. It explains Donald Trump in the US, Emmanuel Macron in France, Germany’s Angela Merkel and even Theresa May, Britain’s prime minister.

The peasants are revolting as in 1848, the year of revolutions – known as the Spring of Nations – when rulers were overthrown by popular discontent. In spring 2017, politicians should tread carefully.

 

Tell a friend View this page in PDF format