Touchstone Extras - Where Have All the Wages Gone? Lost pay and profits outside financial services

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This is a report about the share of wages in national income ('the wage share') in the UK. Over the last 35 years there has been a substantial shift from wages to profits in the UK economy. Data from the Office for National Statistics show that between 1977 and 2008 the wage share fell from 59 per cent of national income to 53 per cent, while the share of profits in national income rose from 25 per cent to 29 per cent. At the same time, average (median) earnings failed to keep pace with growth in national income (as measured by gross domestic product (GDP)). If wages had kept pace with growth in overall UK output between 1980 and 2010, median annual earnings for full-time workers would now be around £7,000 higher than they actually are. The fall in the share of wages in national income accounts for just over a third of this gap, with the other two-thirds due to earnings becoming more unequal.

Taking account of increased employer National Insurance contributions and pension contributions (which form part of employee compensation in the national accounts), the fall in the wage share is even more pronounced. A comparison with other countries using data from the OECD shows that, while most countries have experienced a declining share of wages in national income over the last four decades, the decline in the wage share in the UK is particularly high by international standards.

Empirical research on the determinants of the falling wage share using cross-country panel data suggests that four different factors are responsible:

  • technological change
  • globalisation (increased liberalisation of product markets and increased mobility of capital across national boundaries)
  • financialisation (the increased role of financial activity and rising prominence of financial institutions in national economies)
  • reductions in the bargaining power of labour.

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