The Economist - UK (2022-02-19)

64 The Economist February 19th 2022
Finance & economics

Labourv capital

The battle of the markups

“A

good compromise”, the saying goes,

“is  when  both  parties  are  dissatis­

fied.”  Dissatisfaction  rages  in  the  post­

lockdown  economy.  Households  say  that

price­gouging  companies  are  jacking  up

prices,  contributing  to  an  inflation  rate

across the rich world of 6.6% year on year.

Companies bat such accusations aside, be­

lieving that they are the truly wronged par­

ty.  They  complain  that  staff  have  become

work­shy ingrates who demand ever­high­

er  wages.  Earlier  this  month  Andrew  Bai­

ley,  the  governor  of  the  Bank  of  England,

courted  controversy  by  suggesting  that

workers  should  moderate  their  wage  de­

mands—even as he failed to tell companies

not to raise their prices.

A  “battle  of  the  markups”,  between

higher wages and higher shop prices, is un­

der way. And there can only be one winner,

all else being equal. Broadly speaking, eco­

nomic  output  must  flow  either  to  owners

of capital, in the form of profits, dividends

and  rents,  or  to  labour,  as  wages,  salaries

and  perks.  Economists  refer  to  this  as  the

“capital” or “labour” share of gdp. Which of

the  two  has  the  upper  hand  in  the  post­

lockdown economy? 

The Economist has  compiled  a  range  of

indicators  to  answer  this  question.  First

we  calculate  a  high­frequency  measure  of

the  capital­labour  share  across  30  mostly

rich  countries.  In  2020  the  aggregate  la­

bour  share  across  this  group  soared  (see

chart  1  on  next  page).  This  was  largely  be­

cause firms continued to pay people’s wag­

es—helped,  in  large  part,  by  government­

stimulus  programmes—even  as  gdp col­

lapsed. Advantage, labour. 

More  recently,  however,  the  battle

seems to have shifted in favour of capital.

Since  reaching  a  peak  in  2020  the  rich­

world  labour  share  has  fallen  by  2.3  per­

centage points. Frustratingly, the data only

go up to September 2021—and most econo­

mists  anyway  argue  that  labour’s  share  is

not  a  perfect  gauge  of  economic  fairness,

since it is devilishly hard to measure. The

evidence  since  then  suggests  that  coun­

tries fall into one of three buckets, depend­

ing  on  how  the  battle  of  the  markups  is

playing out.

In  the  first  camp  is  Britain.  There,  un­

derlying wage growth is in the region of 5%

a  year,  unusually  fast  by  rich­world  stan­

dards. But corporations seem not to have a

great  deal  of  pricing  power,  meaning  that

they  are  struggling  to  fully  offset  higher

costs in the form of higher prices. Digging

into  Britain’s  national  accounts,  we  esti­

mate that the nominal profit in pounds per

unit  of  goods  and  services  sold  is  only

S AN FRANCISCO

Companies are raising prices. Workers are demanding higher wages.

Who is winning?

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