What share of the economic pie goes to workers?

Over the last two decades, the proportion of national income going to employees and the self-employed – the labour share – has declined in many advanced economies. This has not happened in the UK, which might seem like good news for workers, but it conceals slow wage growth and rising inequality.

The proportion of UK national income going to workers – what’s known as the labour share – has stayed relatively stable in recent decades. Indeed, it has dropped only two percentage points since 1981, a trend that differs from what’s happened in many other advanced economies, where the labour share has declined.

But this stability masks a significant issue: the lack of wage growth across workers in the UK. In real terms, the typical UK worker today only earns marginally more than before the global financial crisis of 2007-09.

Why do economists care about the labour share?

The labour share is an important economic indicator as it reflects the distribution of income between workers and capital owners. National income, which represents the total value of all goods and services produced in a country’s economy, is primarily distributed between two groups: workers and capital owners.

The labour share refers to the portion that goes to workers, including employees and the self-employed. It measures the share of employee wages, salaries and other benefits, as well as self-employed income, in national income. The capital portion represents the share of national income allocated to the owners of capital assets, including corporations, real estate and financial investments.

Importantly, a decline in the labour share implies that the gains from economic growth are not being shared equally between workers and capital owners.

How has the labour share evolved in the UK?

Over the last 40 years, the labour share of income has stayed relatively stable in the UK, with only a slight decrease overall. Figure 1 shows employees’ compensation (wages, salaries and benefits) as well as self-employed income as a share of gross domestic product (GDP), a measure of national income.

In 1981, approximately 56% of national income went to workers. This share declined to under 50% in 1996. A notable increase between 1996 and 2002 brought the labour share back to roughly its 1981 value, and it has stayed stable since then (54% in 2022). The apparently steep increase and decline around the Covid-19 pandemic are likely to have been due to some data issues.

While there have been some fluctuations over time, the picture is clear: the labour share of income has stayed relatively stable, particularly over the past two decades. This stability contrasts sharply with the United States and other advanced economies where there was a substantial decline in the 1990s and at the beginning of 2000s (St Louis FRED; Karabarbounis and Neiman, 2014).

Figure 1: The labour share of income in the UK, 1981 to 2022

Source: Extended version of Teichgraeber and Van Reenen, 2021, using Office for National Statistics (ONS) data.

Why has the labour share been stable in the UK recently?

Unfortunately, there is no definitive answer. Various factors, not all of which have been thoroughly examined in the UK context, influence the labour share in different ways. Nevertheless, studies from other countries offer valuable insights that could be relevant to the UK.

Some experts argue that workers having strong bargaining power – through unions, labour market institutions and minimum wages – plays an important role in determining the labour share (Stansbury and Summers, 2020). Notably, a decline in workers’ bargaining power during the years of the Thatcher government (1979-90) coincides with a decline in the labour share in the UK.

Other studies point to the importance of so-called ‘superstar firms’, which have large market shares and capture a large portion of profits. There is substantial evidence for an increase in the market power of large firms in the United States and a link to the recent fall in the labour share (Autor et al, 2020, De Loecker et al, 2020).

One recent study finds evidence for an increase in market power of large firms in the UK (De Loecker et al, 2022), although the link to the labour share has not been studied so much.

Other factors affecting the labour share include the rise of automation and artificial intelligence (Acemoglu and Restrepo, 2018), although this has not been studied specifically in the UK context. Some studies also point to potential difficulties in measuring the labour share precisely (Rognlie, 2015; Smith et al, 2019).

Does a stable labour share mean that all workers benefit from economic growth?

Stability in the labour share suggests that workers’ compensation has, on average, kept pace with GDP growth. This might seem like good news for UK workers.

Yet this stability does not tell us whether workers’ compensation has grown at all and how growth differs between workers. In fact, economic growth in the UK has been slow over the last 15 years, with workers’ wage growth stagnating at the same time.

A useful way to assess trends in overall earnings growth and inequality is to look at the growth of labour productivity (‘economic growth’) and compare it with the growth of average as well as median compensation (‘earnings growth’). This comparison is shown in Figure 2.

Labour productivity refers to the value of goods and services (GDP) produced per hour worked, a measure of how productive workers are. Comparing this with the growth of average and median compensation helps us to understand whether workers benefit from a more productive economy. It also allows us to understand whether some workers benefit more than others.

Median compensation reflects the earnings of the typical worker in the middle of the income distribution. In contrast, average compensation can grow substantially due to a small fraction of workers with exceptionally high earnings growth (what economists refer to as outliers).

Figure 2: The growth of labour productivity and compensation/wages in the UK, 1981 to 2022

Source: Extended version of Teichgraeber and Van Reenen, 2021 using ONS and Labour Force Survey (LFS) data. All data are adjusted for inflation.

Figure 2 illustrates the growth of labour productivity (measured as GDP per hour worked), average employee compensation (measured as compensation per hour worked) and median wages (the wage of the worker at the median of the wage distribution).

Median wages exclude non-wage benefits like pensions. Data on median compensation are not readily available, but comparing compensation and wage growth provides additional insights, as outlined below. All lines are indexed to a value of one in 1981, allowing us to compare values as overall growth of the respective series. A few important observations stand out.

First, labour productivity and average workers’ compensation have grown at approximately the same rate. This is not surprising and reflects the stability of the labour share.

Second, the typical worker’s wage (the median) has grown at a much lower rate than average compensation. In 2022, average compensation was 1.84 times higher than average compensation in 1981 (adjusted for inflation). But median wages only increased by a factor of 1.69 over the same period.

The gap indicates an increase in inequality between workers. It also reflects the fact that workers’ compensation has grown substantially more than wages (Teichgraeber and Van Reenen, 2021). This trend is due to strong growth in non-wage benefits like pensions that are included in the compensation measure, but might only benefit a small share of the workforce (Bell, 2015).

Third, the wage growth of the typical worker has been particularly weak since 2007, with only a 12% increase over the last 15 years. In comparison, the typical worker’s wage increased by more than 27% between 1992 and 2007.

Finally, labour productivity has barely grown since the global financial crisis of 2007-09. Strikingly, the same can be said for both average worker compensation and median wages. The typical worker’s wage (the median) was about the same in 2007 and in 2019 before the start of the Covid-19 pandemic.

In short, although the labour share has been relatively stable over time, not all workers have benefitted equally from economic growth in the past. In the last 15 years, there has barely been any productivity growth, coinciding with a lack of wage growth.

The challenge ahead: boosting productivity and wage growth

How can we make wages grow at rates last seen before the global financial crisis? A key to the answer is productivity growth, a prominent topic in Economics Observatory articles. Adding to its relevance, the UK’s chancellor recently unveiled ‘a new era for economic growth’, targeting the UK’s productivity problem.

Indeed, periods of strong productivity growth coincide with strong wage growth (as shown in Figure 2). Of course, an increase in productivity does not guarantee an increase in wages.

But there is substantial evidence that booming productivity can be translated into strong wage growth with the right policies in place (Bell et al, 2024; Norris Keiller et al, 2024). Sufficient minimum wages, workers’ rights as well as a high level of education and training can all help to ensure that workers benefit from productivity growth.