- Applied Institute for Research in Economics
The functional distribution of income (the division of national income between capital in the form of profits, and labour in the form of wages) has long been at the margins of economic inquiry. Yet, across industrialised economies, the last four decades have seen a decisive shift away from wages and towards profits. Further, the share of national income going to wages has itself become increasingly unequally distributed across the workforce.
In the last few years it has become clear that the pressures that follow from these shifts are of increasing public concern. To take one example, French economist Thomas Piketty’s recent 700-page tome on the economics of inequality - Capital in the 21st Century – became a surprising bestseller causing a media furore. Second, the rise of populist political parties and movements – the Brexit vote in the UK; Trump in the United States – can be traced to profound disenchantment with globalisation, economic liberalism and adverse shifts in the distribution of income in many countries. Even some of the architects of neoliberal economic policy (the dominant economic ideology since the 1980s) in the International Monetary Fund have begun to question the impact of orthodox economic policy prescriptions, noting their link to inequality and slow growth in incomes.
Against this backdrop, the ESRC-sponsored seminar series Factor Income Distribution, Work and Employment: Social and Economic Perspectives provides a forum for discussion between research students and established academics from economics and other social sciences about current issues of distribution.
The aim of this series is to explore alternative economic perspectives on the contemporary nature of factor income distribution, work and employment. Workshops to date have sought to explore and understand high-level shifts in distribution between profits and wages and then, at a more detailed level, developments in labour markets, work and employment that account for inequalities in the distribution of wages across the employed population.
These seminars have considered the connections between the changes in the distribution of income, rising personal income inequality and the mechanisms which led to the financial crisis of 2007-2008; the process of financialisation within capitalism and its impact on distribution; the impact of government spending cuts on aggregate demand and earnings; and methodological issues relating to the investigation of labour markets, work and employment in order to have a solid foundation for investigating and interpreting income and distribution.
The fourth meeting of the seminar series was held earlier this year at Leeds University Business School, with a focus on two areas: first, institutional and behavioural drivers of wage income and, second, in a roundtable discussion, the likely impact of Brexit on employment and incomes in Britain.
In the former presentations, both contributions came from research students – reflecting the aim of the series to foster dialogue between established academics and research students. “To what extent are men and women paid according to the comparable worth of their jobs?”, asked Camille Heslop-Martin, from Nottingham Business School. The importance of this further dimension to income inequality within the UK workforce was noted by Theresa May in her first remarks as Prime Minister: “If you’re a woman, you will earn less than a man”.
As seminar participants learned, whilst there has been progress among employers in ensuring that that, within the same job, women should not be paid less than men, problems remain due to occupational crowding of men and women, with female-dominated jobs typically paying less than male-dominated jobs despite being of comparable worth.
The recent claim for pay equality between (typically female) shopfloor workers and their (typically male) warehouse worker colleagues at Asda, and an earlier case at Birmingham City Council, exemplify the problem and suggest that significant inequalities – and the institutions that create and reinforce them – remain in the UK.
Clearly rising female participation in the labour market alone is not sufficient to break down these inequalities. But surely these concerns do not arise among progressive employers, such as the university sector? That is the question Camille seeks to answer as part of her research, as she explained in her seminar presentation. Through a mixed-methods approach she will identify perceptions of comparable worth among the workforce, the extent of incomparable worth and the barriers preventing full equality. If problems are found to abound in this sector, then the policy challenges in addressing this form of inequality will be even greater.
Although we tend to focus on how institutions and economic forces have widened the income distribution, what if income is not as important as economists assume? Do some people value the environment more than income which, after all, is merely a means to the end of (damaging) consumption? Here Alexandra Arntsen, research student at Birmingham City Business School, posed a novel question: if the preferences of those who care most about the environment are consistent, they should be more willing to accept the reduced consumption associated with reduced working hours.
However, as Alexandra explained, her initial analysis of European Social Survey data indicates that this potential positive relationship between concern for the environment and willingness to work shorter hours does not hold across individuals. Rather, everything else equal (including income, household composition, age and education), those who care most about the environment appear to be more likely to desire longer working hours.
Clearly more work is required, with the nature of the relationship between environmental concern and preference for working hours possibly varying at different points in the income distribution or according to general wealth (not captured in the survey data). However, the issues Alexandra raised do indicate the challenges involved in simultaneously securing a higher quality of life for the workforce, a greater equality in the distribution of income and economic and environmental sustainability.
The Leeds seminar finished with a roundtable discussion considering the likely impact of the Brexit decision on incomes and employment. Clearly the precise meaning of Brexit is still being worked through, but the connections between possible outcomes and the level and distribution of income can be identified.
In recent years, the UK labour market has defied expectations by bouncing back from the impact of the financial crisis to generate a record employment rate, correspondingly low unemployment and, in particular, in comparison with many other European economics, low youth unemployment.
However, as Dr Marco Veronese Passarella, lecturer at Leeds University Business School, showed, the flip-side of this has been low growth in money wages (about half the rate of increase in the years after the financial crisis when compared to the period before) and in real, inflation adjusted terms, a cut in the value of average hourly wages. Indeed, in a comparison of real wages across EU member states, the US, Japan, Canada and Australia, the UK is one of only three countries to see a fall in the real value of wages since the financial crisis. Most starkly, Marco showed that the UK has suffered a cut in real hourly pay of about the same magnitude as Greece between 2007 and the end of 2015.
One explanation for this, highlighted by fellow panellist Paul Forrest, Head of Research at the West Midlands Economic Forum, is the remarkably poor performance of UK productivity in recent years, which has stagnated post-crisis despite a recovery in output. In distributional terms this matters in that productivity influences the size of the (national income) pie that is divided between wages and profits.
However, as the Bank of England’s Chief Economist Andy Haldane has shown, UK wages have fallen more than productivity and so not only has the value of wage income fallen, labour’s share of national income has fallen as well.
Following this, we can see Brexit as a potential negative shock to an economy that is already suffering from forces, policies and structures that are intensifying adverse trends in income distribution.
Further, as Paul Forrest discussed, the UK has become an important source for foreign direct investment (FDI); just under a third of all FDI projects in the EU are in the UK and these account for two-fifths of all FDI expenditure in the EU. Brexit clearly puts a question mark over some of this as trading conditions look set to worsen and the UK is in danger of losing its status as an attractive, open bridgehead to the large EU market. This has implications not only directly for jobs, but in the longer term, FDI is an important driver of productivity and any reduction in FDI threatens a further worsening of incomes and distribution.
As the Leeds seminar indicates, there are many levels and angles to income and income distribution and the issues that emerge from investigation are deep-seated and complex. This ESRC seminar series will, help to develop analysis of the issues and identify commonly agreed areas for policy focus by bringing together a range of academic perspectives. However, rising popular discontent with inequality and declining living standards clearly demonstrate that complexity cannot be taken as an excuse for inaction: policymakers beware!
For information on previous seminars in the series and how to register for a future workshop, visit the website.
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The views expressed in this article are those of the author and may not reflect the views of Leeds University business school or the University of Leeds.