Two thirds of corporate profits since the 1980s have come from keeping wages down

KJ, Fee and Chris discover how...

SOURCE HIGH PAY CENTRE: One Law For Them - The runaway growth of executive pay

Leading economist Gavyn Davies has argued that low wage growth accounts for more than two thirds of corporate profits since the 1980s. As a substantial proportion of these profits have been used to pay dividends to shareholders, executives (who are directly paid in restricted shares) have directly increased their pay at the expense of their workers.

SOURCE FINANCIAL TIMES: Gavyn Davies - The real underpinning for equities

In the past, market economies have tended to erode unusually high profit margins through price competition which has restored real wages to their previous trends. That has always been seen as the natural order of things in a capitalist system. But there is no sign of it happening this time. It is important to recognise that similar patterns have been seen not just in the US, but throughout the developed world, starting in the late 1970s. In fact, the gross profit share in the advanced economies has risen by about 10 percentage points of GDP over three decades, and the wage share has fallen by the same amount. The cumulative effect on corporate earnings, and therefore on equity markets, has been enormous. Consider the following. If the 10 percentage points decline in the wage share had not occurred, and everything else had (implausibly) stayed the same, then gross profits in the developed economies would have been about one-third lower than they are today and net profits (after depreciation) would have been about two-thirds lower. This is an enormous upheaval in the distribution of income in the global economy, and it has happened in an almost continuous straight line over the entire period. It seems to have been impervious to every kind of shock, including the decline in inflation, the technology bubble, the arrival of the BRICs, the collapse in the global financial system and two successive Ashes victories for England against Australia.

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