Ten mistakes that permeated the Channel 4 ‘How Rich Are You?’ programme on inequality (part 2)
7) That a fall in the wage share of GDP means the same thing as ‘wages have fallen’
Another big chunk of the programme was devoted to Paul Mason outlining the sort of economics outlined in Thomas Piketty’s book Capital in the Twenty First Century. The first thing to note is that Piketty’s thesis is incredibly contentious. In a recent survey of top economists, just 2 per cent agreed with the finding that ‘the most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate.’ This is a bit of a straw man – even Piketty’s thesis is more about what will happen in the future than r > g explaining what has happened in the past. However, there is widespread doubt about Piketty’s whole thesis. Yet you wouldn’t have thought there was any disagreement given the way the programme was presented.
Mason used a machine to attempt to show that the wage share of the economy had fallen significantly relative to the 1970s and that the share going to profits had risen considerably – and that this was responsible for rising inequality. During this segment the falling labour share of GDP was consistently conflated with falling wages per se.
So there are a few things to note here: first, in the period since the 1970s, earnings have gone up substantially across the whole income spectrum. Period. It’s true that the labour share of GDP has fallen in that time, but the significant increase in GDP has meant that everyone has got better off. The ONS suggests, for example, that those in the bottom quintile working full-time saw earnings increase by 86 per cent between 1975 and 2013, with even larger increases for part-time employees. The poor have not got poorer – they have got significantly richer.
Secondly, as the chart below shows (from ONS figures), it is somewhat disingenuous to use the 1970s as a comparator period for the employee compensation share of GDP.
The employee compensation share was abnormally high in the 1970s and the share going to profits abnormally low. In fact, what has broadly happened over the long period since 1955 is that there has been a fall in the proportion going to employee compensation whilst the proportion going to profits has remained largely unchanged.
Thirdly, Paul Mason desperately wants to say that the fall in the wage share is in part because of a lack of bargaining power for workers, caused by the weakening of trade unions through the 1980s. But study after study has rejected this thesis, instead highlighting mis-measurement of self-employment income and the impact of globalisation as the key drivers of this fall. If Mason’s hunch was right – and his policy prescriptions of more generous benefits and stronger trade unions led to a higher wage share – then we’d expect to see this when we look at countries with more generous benefits and stronger trade unions. There is no international evidence that I have been able to find to suggest this is a key driver. The most plausible explanations we still have for a falling labour share are globalisation, technological change, a shift to self-employment and a combination of our population ageing and becoming more prosperous. Indeed, a healthy ageing economy would expect to see the labour share of income fall as we become more prosperous – we have more leisure time as machines can do more of the work for us! This is a good thing.
8) That UK social mobility has collapsed
Social mobility too was conflated with inequality as if the two were the same thing, or that inequality definitely caused social mobility. The conventional wisdom that social mobility has collapsed was again on show, apparently indicated by the shocking statistic that just 6 per cent of people in the bottom decile will reach the top decile of the income distribution. Backstage, I tried to point out that even if there were perfect mobility in the sense of origin independence from where one started, you would expect only 10 per cent of those in the bottom decile to reach the top decile. In reality, we would expect there to be at least a degree of stickiness. So the fact that 6 per cent of people at the very bottom have the chance to get to the very top is perhaps not as alarming as it sounds. It does not mean – as some people seemed to interpret it – that 94 per cent of people at the very bottom stay there.
It’s true there are some economists who use intergenerational income mobility data to suggest that the UK has low levels of ‘social mobility’ between generations. More broadly, some have put forward theories of transmission mechanisms which could mean social mobility is harmed by greater income inequality in future. However, these papers are nowhere near as clear in their conclusions as outlined on the show. This is especially true for the UK because the data used on incomes across generations has been criticised for: being patchy, having collection issues and only providing snapshot data for families (i.e. potentially missing valuable information on how incomes change over time). They have been described by the authors as ‘unclear’ and are heavily dependent on the assumptions used. And yet the house economist on the show just asserted that it was much more difficult to get on now than in the past, and that your prospects were determined by your familial background much more now than in the past. What’s more, it was just assumed that any effect was down to the gap between rich and poor, as opposed to other factors which could explain a decline in social mobility.
In fact, studies by sociologists using intergenerational class mobility (and where the data is of a higher quality) suggest that social mobility hasn’t really fallen at all. New research out this week concluded: ‘It is widely believed in political and in media circles that social mobility is in decline. But the evidence so far available from sociological research, focused on intergenerational class mobility, is not supportive of this view. We present results based on a newly-constructed dataset covering four birth cohorts that provides improved data for the study of trends in class mobility and that also allows analyses to move from the twentieth into the twenty-first century. These results confirm that there has been no decline in mobility, whether considered in absolute or relative terms.’ As my colleague Chris Snowdon has blogged, this research shows ‘77-78 per cent of men born between 1980-84 had moved out of the class of their birth by the time they were 27 years old. This is almost exactly the same degree of mobility enjoyed by men born in 1946, 1958 and 1970. For women, the mobility rate exceeds 80 per cent and is higher than for any generation of British women on record.’ To reiterate, the authors concluded: ‘what we can say here with certainty is that so far as total rates of intergenerational class mobility are concerned, our results, like those reported in earlier sociological research, give no support whatever to claims of mobility in decline’.
9) That increasing minimum wages substantially wouldn’t harm job prospects
In the discussion on potential solutions to inequality, I said that we should focus policies on making sure we have robust economic growth and seek to reduce the cost of living (to improve living standards for the poorest) rather than worrying about the gap, punitive taxation and fixing minimum wage rates higher. The discussion inevitably descended into a cross-examination of my position on the minimum wage. After I’d said that a statutory rise of the minimum wage to the living wage would lead to fewer entry-level jobs for young and unskilled workers, Richard Bacon (the presenter) asked me whether I was wrong to have objected to the minimum wage when it was first introduced. I explained that I believed I wasn’t, for two reasons. The first (which was cut out of the programme) was that the Low Pay Commission takes into consideration the impact of a minimum wage rise on job opportunities – therefore it wasn’t surprising that there hadn’t been a huge effect on employment. But, I said, this doesn’t mean that the minimum wage could be raised to the Living Wage (which is based on the costs of essentials and not on the state of productivity/the economy) without negative consequences. The overwhelming consensus of the literature is that the level of the minimum wage still matters. Furthermore, I pointed out that since we’d had the minimum wage, youth and student unemployment rates in particular had worsened relative to other countries – which is exactly what economic theory would predict.
10) That high income taxes and wealth taxes would be harmless
In the solutions section we also touched briefly on income and wealth taxes – and whether we should be in favour of raising tax rates on ‘the rich’. The cold reality for the redistributionists is that there is substantial evidence that even the 50p income tax rate was above the revenue maximising rate of income. High income individuals are increasingly mobile, and tax-incentives change behaviour and how people tax plan. A recent argument has therefore been that we should instead tax wealth. Indeed, Richard Bacon persistently asked me why I wasn’t in favour of a wealth tax. The problem is that a wealth tax is effectively like a large annual tax on nominal investment income. Just as we would expect income taxes to adversely affect incentives, we would also expect rational individuals to change their behaviour in earning income given wealth taxes imposed on earned income. If these taxes reduce the pay-offs that individuals get for coming up with high quality productivity enhancing innovations, and we get fewer of them as a result – then we’ll all be worse off. Of course, from a more practical level countries have found huge problems in actually implementing wealth taxes – either the tax base is too narrow, meaning they are unfair and do not raise much money, or they include all types of assets (meaning the tax becomes extremely difficult to administer). It’s for these reasons that they have been abandoned in Sweden and Spain, and raise paltry amounts of revenue in France.
Click here to read Part 1.