Wednesday, 28 February 2018

Its Not Inflation Driving Interest Rates Higher (9/10) - Rising Wage Share and Rising Profits

Rising Wage Share and Rising Profits 

In Part 6, I described the rise in the wage share that occurred in the 1960's, and 70's that led to a squeeze on profits, as set out by Glyn and Sutcliffe et al. King and Regan also say 

“Their conclusions are supported by a careful reworking of the data by Burgess & Webb.” (See: The Profits of British Industry, Lloyds Bank Review (April 1974)) 

They go on to cite further confirmation in the work of Thirlwall, Heidensohn, and Zygmant, “according to whom “a steady rise of the wage income ratio since 1950 appears to accelerate in the 1960’s.”. 

(See Thirlwall, “Changes in Industrial Composition in The UK and the US and Labour's Share of National Income 1948-69”, Bulletin of the Oxford University Institute of Economics and Statistics (Nov 1972); Heidensohn and Zygmant, “On Some Common Fallacies in Interpreting Aggregate Pay Share Figures” Zeitschrift fur die Gesamte Staatswissenchaft (Apr 1974)) 

King & Regan conclude the chapter by saying, 

“Glyn and Sutcliffe suggest that the profits squeeze is an international phenomenon, although some of their evidence for other Western economies is rather weak… Convincing evidence of a recent shift to labour in the United States is provided by Thirlwall, and also by Nordhaus. For Germany, on the other hand, Heidensohn and Zygmant show that the wage income ratio has been constant, with perhaps a slight downward tendency since 1956.” (p 27) 

(See also W.D. Nordhaus, “The Falling Share of Profits”, Brookings Papers on Economic Activity (1974)) 

The rise in US annual and hourly wages are given here, based on BEA data. In 1960 average wages stood at $4817, and rose to $7711 in 1970, a rise of 60%. By 1974, the start of the crisis phase of the post-war long wave, they had risen to $9994, a rise of 107.47%. 

The same site gives data for the growth of profits, which rose from $48.5 billion in 1960 to $71.5 billion in 1970, a rise of 47%. And by 1974, this had risen to $132.1 billion, a rise since 1960 of 172.37%. This latter figure would then seem to contradict the previous data about rising wages causing a squeeze on profits, but this is a misreading of the data, and illustrates the problem referred to in Part 5. The data for profits is for total profits, whereas the figures for wages are wages per worker. As described in Part 5, therefore, it is quite possible for the rate of surplus value to be falling as a rising demand for labour-power causes wages per worker to be rising, whilst, as a result of that very same rising demand for labour-power, and an increase in the number of workers employed, the amount of surplus value produced is rising. In 1960, there were 69 million people employed in the US, rising to over 91 million in 1974. 

Taking the average annual wage in 1960 of $4817, and multiplying by the workforce we get $332,373,000,000 ($332.4 billion), and taking the figure for 1974 of $9994 and multiplying by the workforce of 91 million, we get $909,454,000,000 ($909.4 billion). That is a rise of 173.80%. But, even this underestimates the growth of the wage share, because between 1960 and 1974, the same processes led to other non-wage improvements in workers conditions, for example, in relation to paid holidays, shorter working week, and so on. 

But, this distinction between the percentage increase in wages, and the proportional share of wages and profits is important, because it also illustrates the error of financial pundits. The speculation news channels repeatedly talk about the expected increases in company earnings. They speak about company earnings (profits) being up by say 10% over the previous year. This is then supposed to provide a justification for the share prices of such companies rising, especially where this increase in profits is more than the increase in the previous year, or than was expected for the current earnings period – which they usually are because earnings expectations are always revised down ahead of earnings season, and the earnings are essentially manipulated, via things such as share buy backs and so on, to ensure that earnings per share figures are higher than had been expected. 

But, as the above illustrates, this figure for increased profits is meaningless on its own. The profits could rise by 100%, but if that rise in the absolute amount of profit is achieved by employing three times as many workers, the fact remains that the rate of surplus value will have fallen, and the rate of profit will have been squeezed as a consequence. As described in Part 5

“If the rate of surplus value is 100%, and 10 workers are employed each on wages of £10, the mass of surplus value is £100, but if the number of workers employed rises from 10 to 20, and this increased demand for labour-power leads to a rise in wages to £12, so that the rate of surplus value falls to 66.6%, with each worker now producing only £8 of surplus value, that does not stop the mass of surplus value rising from £100 to £160, a rise of 60%!” 

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